Filed pursuant to Rule 424(b)(5)
Registration No. 333-97457
Prospectus supplement dated June 25, 2003
(To prospectus dated September 25, 2002)
[Graphic Omitted]
WACHOVIA
$1,250,000,000
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER AND SERVICER
WACHOVIA ASSET SECURITIZATION, INC. 2003-HE2 TRUST
ISSUER
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
WACHOVIA ASSET SECURITIZATION, INC. ASSET-BACKED NOTES, SERIES 2003-HE2
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-19 IN THIS
PROSPECTUS SUPPLEMENT AND ON PAGE 10 OF THE ACCOMPANYING PROSPECTUS.
The notes will not be insured or guaranteed by any governmental agency or
instrumentality.
The notes will represent debt obligations of the trust fund only and will not
represent interests in or obligations of any other entity.
The notes are not deposits or other obligations of Wachovia Bank, National
Association or any other bank and are not insured by the FDIC.
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THE TRUST
o will issue three classes of notes and the certificates. Only the three
classes of notes are offered by this prospectus supplement and the
accompanying prospectus. You can find the principal balance, note rate and
certain other characteristics of the notes, on page S-6 of this prospectus
supplement.
o will make payments on the notes and the certificates primarily from
collections on two groups of home equity revolving credit line loans.
CREDIT ENHANCEMENT WILL CONSIST OF:
o Excess interest, to the extent described in this prospectus supplement;
o Overcollateralization and cross-collateralization, to the extent described
in this prospectus supplement; and
o An irrevocable and unconditional financial guaranty insurance policy issued
by Financial Guaranty Insurance Company insuring the notes, which will
protect holders of the notes against certain shortfalls in amounts due to
be distributed at the times and to the extent described in this prospectus
supplement.
[Graphic Omitted]
FGIC(R)
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY BE USED BY
WACHOVIA SECURITIES, AN AFFILIATE OF THE DEPOSITOR, IN CONNECTION WITH OFFERS
AND SALES OF THE NOTES IN MARKET-MAKING TRANSACTIONS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU
OTHERWISE.
Delivery of the notes is expected to be made in book entry form on or about July
2, 2003. The notes will be offered in the United States and Europe.
WACHOVIA SECURITIES
MERRILL LYNCH & CO. UBS INVESTMENT BANK
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We tell you about the notes in two separate documents that
progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to a particular series of securities,
including your notes; and
o this prospectus supplement, which describes the specific terms of
your notes and may be different from the information in the
prospectus.
We include cross-references in this prospectus supplement and in the
accompanying prospectus to captions in these materials where you can find
further related discussions. The Table of Contents on the following page
provides the pages on which these captions can be found.
If you require additional information, the mailing address of the
principal executive office of the depositor is Wachovia Asset Securitization,
Inc., 8739 Research Drive, NC0121-Suite D, Charlotte, North Carolina 28288-0121,
and its telephone number is (704) 593-7616. For other means of acquiring
additional information about the depositor or the notes, see "Where You can Find
More Information," "Description of the Securities--Reports to Securityholders"
and "Incorporation of Certain Information by Reference" in the attached
prospectus.
S-2
TABLE OF CONTENTS
PAGE
Summary ............................................................ S-4
Risk Factors ....................................................... S-19
Introduction ....................................................... S-28
Description of the Mortgage
Loans .......................................................... S-28
General ....................................................... S-28
Initial Mortgage Loans ........................................ S-29
Initial Mortgage Loan Characteristics ......................... S-31
Terms of the Mortgage Loans ................................... S-47
The Funding Account; Conveyance of Additional Balances and
Subsequent Mortgatge Loans.................................. S-48
The Funding Account ..................................... S-48
Subsequent Mortgage Loans ............................... S-49
Purchase of Additional Balances ......................... S-49
Underwriting Standards ........................................ S-51
THE SELLER AND SERVICER ............................................ S-54
General ....................................................... S-54
Delinquency and Loss Experience of the Servicer's Portfolio ... S-54
Servicing and Other Compensation and Payment of Expenses ...... S-55
THE ISSUER ......................................................... S-56
THE OWNER TRUSTEE .................................................. S-56
THE INDENTURE TRUSTEE .............................................. S-57
THE PAYING AGENT ................................................... S-57
THE ENHANCER ....................................................... S-57
THE YIELD MAINTENANCE AGREEMENT PROVIDER ........................... S-59
THE AUCTION AGENT .................................................. S-60
DESCRIPTION OF THE SECURITIES ...................................... S-60
General ....................................................... S-60
Book-Entry Notes .............................................. S-60
Payments on the Notes ......................................... S-63
Interest Payments on the Notes ................................ S-63
Principal Payments on the Notes ............................... S-64
Priority of Distributions ..................................... S-64
Optional Transfers of Mortgage Loans to Holders of Certificates S-69
Overcollateralization ......................................... S-70
The Paying Agent .............................................. S-70
Maturity and Optional Redemption .............................. S-70
The Yield Maintenance Agreements .............................. S-71
Glossary of Terms ............................................. S-72
DESCRIPTION OF THE POLICY .......................................... S-84
YIELD AND PREPAYMENT CONSIDERATIONS ................................ S-86
THE AGREEMENTS ..................................................... S-94
The Purchase Agreement ............................................. S-94
Purchase of Mortgage Loans ................................... S-94
Representations and Warranties ............................... S-95
Review of Mortgage Loans ..................................... S-96
The Servicing Agreement ............................................ S-96
Principal Collections and Interest Collections .............. S-96
Collection and Other Servicing Procedures ................... S-97
Realization Upon Defaulted Loans ............................ S-98
Non-Recordation of Assignments; Possession of Mortgages ..... S-99
Modification of Mortgage Loans .............................. S-100
Servicing Default; Rights Upon Servicing Default ............ S-100
Evidence as to Compliance ................................... S-101
Certain Matters Regarding the Servicer ...................... S-101
Amendment ................................................... S-102
The Trust Agreement and the Indenture .............................. S-102
The Trust Fund .............................................. S-102
Reports To Noteholders ...................................... S-103
Certain Covenants ........................................... S-103
Events of Default; Rights Upon Event of Default ............. S-104
Amendment and Modification of
Trust Agreement and Indenture ........................ S-106
Termination; Redemption of Notes ............................ S-107
Certain Matters Regarding the Indenture
Trustee and the Issuer ............................... S-108
USE OF PROCEEDS .................................................... S-108
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS ......................... S-108
Status as Real Property Loans ................................. S-109
Original Issue Discount ....................................... S-109
Market Discount ............................................... S-111
Premium ....................................................... S-112
Realized Losses ............................................... S-113
Sales of Notes ................................................ S-113
Backup Withholding ............................................ S-114
Tax Treatment of Foreign Investors ............................ S-114
New Withholding Regulations ................................... S-114
STATE AND OTHER TAX CONSEQUENCES ................................... S-115
ERISA CONSIDERATIONS ............................................... S-115
LEGAL INVESTMENT ................................................... S-115
UNDERWRITING ....................................................... S-116
LEGAL MATTERS ...................................................... S-117
RATINGS ............................................................ S-117
EXPERTS ............................................................ S-117
ANNEX I AUCTION PROCEDURES ........................................ A-I
ANNEX II SETTLEMENT PROCEDURES ..................................... A-II
S-3
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS.
Issuer or Trust Fund........................Wachovia Asset Securitization, Inc.
2003-HE2 Trust.
Title of the offered securities ............Wachovia Asset Securitization, Inc.
Asset-Backed Notes, Series 2003-HE2.
Certificates................................Wachovia Asset Securitization, Inc.
Asset-Backed Certificates, Series
2003-HE2. The certificates are not
offered by this prospectus
supplement.
Depositor...................................Wachovia Asset Securitization, Inc.
FOR MORE INFORMATION ON THE
DEPOSITOR, WE REFER YOU TO "THE
DEPOSITOR" IN THE ACCOMPANYING
PROSPECTUS.
Seller and Servicer.........................Wachovia Bank, National Association
is the originator and seller of the
home equity revolving credit line
loans, or mortgage loans, and will
be the servicer of the mortgage
loans. The servicer will be
obligated to service the mortgage
loans pursuant to the servicing
agreement to be dated as of the
closing date, among the servicer,
the issuer and the indenture
trustee.
WE REFER YOU TO "THE AGREEMENTS--THE
SERVICING AGREEMENT" AND "THE SELLER
AND SERVICER--GENERAL" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER
INFORMATION ON THE SELLER AND
SERVICER.
Owner Trustee...............................Wilmington Trust Company.
WE REFER YOU TO "THE OWNER TRUSTEE"
IN THIS PROSPECTUS SUPPLEMENT FOR
FURTHER INFORMATION ON THE OWNER
TRUSTEE.
Indenture Trustee...........................U.S. Bank National Association
WE REFER YOU TO "THE INDENTURE
TRUSTEE" IN THIS PROSPECTUS
SUPPLEMENT FOR FURTHER INFORMATION
ON THE INDENTURE TRUSTEE.
Closing Date................................On or about July 2, 2003.
Cut-Off Date ...............................The opening of business on June 1,
2003.
Payment Date ...............................The 25th day of each month, or,
if that day is not a business day,
the next business day, beginning on
July 25, 2003.
S-4
Scheduled final payment date................The payment date occurring in June
2033. The actual final payment date
could be substantially earlier.
Form of securities .........................Book-entry.
SEE "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY NOTES" IN
THIS PROSPECTUS SUPPLEMENT.
Minimum denominations.......................Class A-I-1 notes and Class A-II-1
notes: $25,000 and integral
multiples of $1,000 in excess of
that amount.
Class A-II-2 notes: $25,000 and
integral multiples of $25,000 in
excess of that amount.
The Enhancer................................Financial Guaranty Insurance
Company.
WE REFER YOU TO "THE ENHANCER" IN
THIS PROSPECTUS SUPPLEMENT FOR
FURTHER INFORMATION.
The Yield Maintenance
Agreement Provider..........................Wachovia Bank, National Association.
The Paying Agent............................Wachovia Bank, National Association.
Legal Investment............................The notes will not be "mortgage
related securities" for purposes of
the SMMEA.
SEE "LEGAL INVESTMENT" IN THIS
PROSPECTUS SUPPLEMENT AND "LEGAL
INVESTMENT" IN THE PROSPECTUS.
S-5
OFFERED NOTES
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CLASS NOTE INITIAL INITIAL RATING FINAL DESIGNATIONS
RATE NOTE BALANCE (MOODY'S/S&P) PAYMENT DATE
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A-I-1 Variable $400,000,000 Aaa/AAA June 2033 Senior/
Variable Rate
Variable $750,000,000 Aaa/AAA June 2033 Senior/
A-II-1 Variable Rate
A-II-2 Auction $100,000,000 Aaa/AAA June 2033 Senior/
Auction Rate
Total Notes: $1,250,000,000
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OTHER INFORMATION:
o Due to losses and prepayments on the mortgage loans in each loan group, the
actual final payment date may occur substantially earlier than the date
listed above.
o On any payment date, the note rate for the Class A-I-1 notes will be equal
to the lesser of:
(1) LIBOR plus a margin of 0.26% per annum; and
(2) the Class A-I-1 net WAC rate.
o On any payment date, the note rate for the Class A-II-1 notes will be equal
to the lesser of:
(1) LIBOR plus a margin of 0.26% per annum; and
(2) the Class A-II-1 net WAC rate.
o The initial note rate for the Class A-II-2 notes will be set by the
broker-dealer on or before the closing date, and will thereafter be
recalculated on a monthly basis beginning in July 2003 pursuant to the
auction procedures described in this prospectus supplement in Annex I. The
note rate for the Class A-II-2 notes will not exceed the maximum auction
rate described in this prospectus supplement in Annex I or the Class A-II-2
net WAC rate.
o The net WAC rate for the Class A-I-1 notes will equal a fraction, expressed
as a per annum rate, the numerator of which is the sum of (1) the interest
due on the mortgage loans in loan group I, less the sum of (a) the amount
of the servicing fee on the mortgage loans in loan group I, (b) the amount
of the pro rata portion of premium on the policy for the Class A-I-1 notes,
and (c) the pro rata portion of interest attributable to additional
balances represented by any additional balance increase amount associated
with loan group I, and (2) payments required to be made under the related
yield maintenance agreement in respect of loan group I, if any, and the
denominator of which is the outstanding note balance of the Class A-I-1
notes, as adjusted on the basis of the actual number of days in the related
interest period and a 360-day year.
S-6
o The net WAC rate for the Class A-II-1 notes will equal a fraction,
expressed as a per annum rate, the numerator of which is the sum of (1) the
product of (i) the interest due on the mortgage loans in loan group II,
less the sum of (a) the amount of the servicing fee on the mortgage loans
in loan group II, (b) the amount of the pro rata portion of premium on the
policy for the Class A-II notes, and (c) the pro rata portion of interest
attributable to additional balances represented by any additional balance
increase amount associated with loan group II and (ii) the outstanding note
balance of the Class A-II-1 notes divided by the aggregate outstanding note
balance of the Class A-II notes, and (2) payments required to be made under
the related yield maintenance agreement in respect of loan group II, if
any, and the denominator of which is the outstanding note balance of the
Class A-II-1 notes, as adjusted on the basis of the actual number of days
in the related interest period and a 360-day year.
o The net WAC rate for the Class A-II-2 notes will equal a fraction,
expressed as a per annum rate, the numerator of which is the product of (i)
the interest due on the mortgage loans in loan group II, less the sum of
(a) the amount of the servicing fee on the mortgage loans in loan group II,
(b) the amount of the pro rata portion of premium on the policy for the
Class A-II notes, and (c) the pro rata portion of interest attributable to
additional balances represented by any additional balance increase amount
associated with loan group II and (ii) the outstanding note balance of the
Class A-II-2 notes divided by the aggregate outstanding note balance of the
Class A-II notes, and the denominator of which is the outstanding note
balance of the Class A-II-2 notes, as adjusted on the basis of the actual
number of days in the related interest period and a 360-day year.
o On any payment date for which the note rate has been determined to be the
applicable net WAC rate, the interest shortfall, if any, will be determined
and will be payable on such payment date or later payment dates, to the
extent funds are available for that purpose from the related loan group as
described in this prospectus supplement. These interest shortfalls will not
be covered by the financial guaranty insurance policy and may remain unpaid
on the final payment date for the notes. Through the payment date in July
2008, holders of the Class A-I-1 notes and the Class A-II-1 notes will be
entitled to payments made pursuant to the related yield maintenance
agreement and, under some circumstances, the other yield maintenance
agreement. Each yield maintenance agreement will pay interest on a notional
balance not higher than the note balance of the related class of notes at a
rate equal to the excess, if any, of LIBOR over 16% per annum. The Class
A-II-2 notes will not receive payments under the yield maintenance
agreements.
S-7
THE TRUST FUND
The depositor will establish the Wachovia Asset Securitization, Inc. 2003-HE2
Trust, a Delaware statutory trust, to issue the notes. The assets of the trust
fund will include the mortgage loans and related assets.
THE MORTGAGE LOAN POOL
Unless we indicate otherwise, the statistical information we present in this
prospectus supplement is approximate and reflects the initial pool of mortgage
loans as of the cut-off date. The aggregate outstanding principal balance of the
mortgage loans as of the cut-off date is approximately $1,250,033,330.
The mortgage loans to be sold to the issuer will be adjustable rate home equity
revolving credit line loans evidenced by the related credit line agreements and
secured by the related mortgages or deeds of trust on residential properties.
The unpaid principal balance of a mortgage loan on any day will be equal to:
o its cut-off date balance, or, if applicable, its subsequent cut-off date
balance,
o PLUS any additional balances relating to that mortgage loan sold to the
issuer before that day,
o MINUS all collections credited against its principal balance in accordance
with the related mortgage loan since the cut-off date or, if applicable,
subsequent cut-off date.
The principal balance of a liquidated mortgage loan after the final recovery of
related liquidation proceeds, or earlier charge-off, will be zero.
MORTGAGE LOAN GROUPS
The mortgage loans sold and transferred to the issuer as of the closing date
will be divided into the following two loan groups:
o The first loan group will include home equity revolving credit line loans
that have an aggregate outstanding principal balance as of the cut-off date
of $400,000,033.76 and will correspond with the Class A-I-1 notes. Loan
group I will consist of first lien mortgage loans that have a credit limit
that is less than or equal to $322,700 and junior lien mortgage loans for
which (i) the sum of the credit limit and the principal balances of any
related senior loans is less than or equal to $322,700 and (ii) the credit
limit is less than or equal to $161,350.
o The second loan group will include home equity revolving credit line loans
that have an aggregate outstanding principal balance as of the cut-off date
of $850,033,296.68 and will correspond with the Class A-II-1 and Class
A-II-2 notes. Loan group II will include a combination of mortgage loans
that meet the restrictions applicable to the first loan group and mortgage
loans that do not meet the restrictions applicable to the first loan group.
o Payments on the Class A-I and the Class A-II notes will be based primarily
on amounts collected or received in respect of the mortgage loans in the
first and second loan groups, respectively.
S-8
As of the cut-off date, the mortgage loans included in loan group I had the
following characteristics:
Number of loans 9,301
Aggregate principal balance $400,000,033.76
Average principal balance $43,006.13
Range of principal balances $5,011.94 to $308,322.43
Weighted average interest rate 4.276%
Range of interest rates 3.490% to 6.850%
Weighted average 4.455%
fully indexed
interest rate
Range of fully indexed 3.490% to 9.000%
interest rates
Weighted average 17.682%
maximum interest rate
Weighted average original 235 months
draw term
Weighted average remaining 231 months
draw term
o Approximately 44.09% and 1.02% of the mortgage loans in loan group I (by
aggregate principal balance as of the cut-off date) are secured by second
or third mortgages or deeds of trust, respectively, and the remainder are
secured by first mortgages or deeds of trust.
As of the cut-off date, the mortgage loans included in loan group II had the
following characteristics:
Number of loans 14,541
Aggregate principal balance $850,033,296.68
Average principal balance $58,457.69
Range of principal balances $5,000.91 to
$2,215,858.25
Weighted average interest 4.273%
rate
Range of interest rates 3.000% to 7.000%
Weighted average fully 4.424%
indexed interest rate
Range of fully indexed 3.000% to 9.000%
interest rates
Weighted average maximum 17.733%
interest rate
Weighted average original 232 months
draw term
Weighted average remaining 227 months
draw term
o Approximately 57.77% and 1.21% of the mortgage loans in loan group II (by
aggregate principal balance as of the cut-off date) are secured by second
or third mortgages or deeds of trust, respectively, and the remainder are
secured by first mortgages or deeds of trust.
SEE "DESCRIPTION OF THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
S-9
LOAN RATE
The loan rate of each mortgage loan is the per annum interest rate required to
be paid by the mortgagor under the terms of the related credit line agreement.
Interest on each mortgage loan is computed daily and payable monthly on the
average daily outstanding principal balance of that mortgage loan. After any
initial teaser period, during which the loan rate may be a fixed or a discounted
variable rate for a period of generally twelve months, the loan rate on each
mortgage loan will be adjusted on each adjustment date to a rate equal to the
sum of an index and a fixed percentage specified in the related credit line
agreement, and is generally subject to a maximum loan rate over the life of the
mortgage loan specified in the related credit line agreement.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS--MORTGAGE LOAN
CHARACTERISTICS" IN THIS PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
THE CERTIFICATES
The trust will also issue the Wachovia Asset Securitization, Inc. Asset-Backed
Certificates, Series 2003-HE2, which will not be offered by this prospectus
supplement.
AUCTION RATE
The note rate for the Class A-II-2 notes will be adjusted each month, based on
the auction procedures described in Annex I, subject to the applicable net WAC
rate and subject to a maximum auction rate, as described in Annex I and Annex II
to this prospectus supplement.
WE REFER YOU TO ANNEX I AND ANNEX II TO THIS PROSPECTUS SUPPLEMENT FOR FURTHER
INFORMATION.
FUNDING ACCOUNT
Accounts designated the "Group I funding account," with respect to the mortgage
loans in loan group I, and the "Group II funding account," with respect to the
mortgage loans in loan group II, will be set up with the indenture trustee on
the closing date for the benefit of the noteholders. On each payment date during
the related revolving period, the servicer will deposit into the applicable
funding account (a) principal collections from the related loan group and (b) on
and after the payment date in January 2004, excess spread from the related loan
group up to the amount necessary to increase the overcollateralization amount to
the overcollateralization target amount as described in this prospectus
supplement, in each case, to the extent not used to purchase additional balances
and/or subsequent mortgage loans or used for other purposes on that payment
date. During the Revolving Periods, funds on deposit in the funding accounts
will be used by the issuer to first purchase additional balances arising under
the mortgage loans in the related loan group and second to purchase subsequent
mortgage loans from the depositor for the related loan group. Any amounts
remaining in a funding account at the end of a revolving period, after giving
effect to the purchase by the issuer of all related additional balances and/or
subsequent mortgage loans, including any purchase on the date on which the
related revolving period ends, and payments to the certificateholders in respect
of any related additional balance increase amount, will be paid to the related
noteholders as a payment of principal.
S-10
Principal payments on the Class A-II-1 notes and the Class A-II-2 notes will be
paid on a pro rata basis.
The mortgage loans acquired by the trust after the closing date will conform to
certain specified characteristics as described in this prospectus supplement.
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS--THE FUNDING ACCOUNT;
CONVEYANCE OF ADDITIONAL BALANCES AND SUBSEQUENT MORTGAGE LOANS" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
PAYMENTS ON THE NOTES
On each monthly payment date, the paying agent will make distributions to the
holders of the notes. The amounts available for distribution will include:
o collections of monthly payments of principal and interest on the mortgage
loans, including prepayments and other unscheduled collections,
PLUS
o amounts from any payments made under the yield maintenance agreements,
PLUS
o amounts from any servicer advances,
PLUS
o amounts from any draws on the policy, for the purposes specified in the
policy,
MINUS
o the pro rata portion of interest attributable to additional balances
represented by any additional balance increase amount,
MINUS
o fees and expenses of the trust.
THE AGGREGATE AMOUNT OF SUCH MONTHLY COLLECTIONS IS DESCRIBED UNDER THE HEADING
"THE AGREEMENTS--THE SERVICING AGREEMENT--PRINCIPAL COLLECTIONS AND INTEREST
COLLECTIONS" IN THIS PROSPECTUS SUPPLEMENT.
Interest payments on the notes will be made monthly on each payment date,
beginning in July 2003, at the note rate described on pages S-6-7 of this
prospectus supplement. Interest payments on the notes will accrue from the
preceding payment date, or, in the case of the first payment date, from the
closing date, through the day before that payment date, and will be calculated
on the basis of the actual number of days in that interest period and a 360-day
year. Interest payments on the Class A-II-1 notes and the Class A-II-2 notes
will be PARI PASSU.
Payments to noteholders will be made from amounts available for distribution in
accordance with the following priority:
DURING EACH OF THE REVOLVING PERIODS, MANAGED AMORTIZATION PERIODS AND RAPID
AMORTIZATION PERIOD:
o from available interest collections from the related loan group, exclusive
of the pro rata portion of interest attributable to additional balances
represented by any related additional balance increase amount, to pay to
the enhancer the pro rata portion of the premium for the policy for the
related notes and any unpaid related premium, with interest thereon, as
provided in the insurance agreement;
o from remaining available interest collections from the related loan group,
exclusive of the pro rata portion of interest attributable to additional
balances represented by any additional
S-11
balance increase amount attributable to the related loan group, to pay
accrued and unpaid interest due on the related notes;
o from remaining available interest collections from the related loan group,
the pro rata portion of interest collections attributable to additional
balances represented by any related additional balance increase amount, to
pay to the holders of the certificates, as a payment of interest on the
related additional balance increase amount;
o in the case of the Class A-I-1 notes and the Class A-II-1 notes, from any
amounts paid under the related yield maintenance agreement, to pay any
interest shortfalls on the related class of notes for such payment date and
any prior payment date to the extent not previously paid, with interest
thereon;
o in the case of the Class A-I-1 notes and the Class A-II-1 notes, from any
remaining amounts paid under the other yield maintenance agreement, to pay
any interest shortfalls on that class of notes to the extent not previously
paid, with interest thereon; and
o from any remaining amounts from the related loan group, to reimburse the
enhancer for prior draws made on the policy in order to make interest
payments on the related notes, with interest thereon, as provided in the
insurance agreement;
DURING THE REVOLVING PERIODS, AFTER THE PAYMENTS DESCRIBED ABOVE:
o from remaining net principal collections from the related loan group, to
pay to the holders of the certificates, the related additional balance
increase amount, if any;
o to deposit into the applicable funding account, any remaining net principal
collections;
o from the excess spread from each loan group to the related funding account,
the aggregate amount of liquidation loss amounts incurred on the mortgage
loans in that loan group in the related collection period, until the
overcollateralization amount for that loan group is equal to the related
overcollateralization target amount, but only until the total
overcollateralization amount equals the total overcollateralization target
amount;
o from the excess spread from one loan group to the funding account for the
other loan group, the aggregate amount of liquidation loss amounts incurred
on the mortgage loans in the other loan group in the related collection
period, to the extent not previously paid, until the overcollateralization
amount for that other loan group is equal to the related
overcollateralization target amount, but only until the total
overcollateralization amount equals the total overcollateralization target
amount;
o from any remaining amounts from the related loan group, to reimburse the
enhancer for prior related draws made on the policy, other than with
respect to payments of interest on the related notes, with interest
thereon, as provided in the insurance agreement;
o on and after the payment date in January 2004, from excess spread from each
loan
S-12
group, to deposit into the related funding account, until the
overcollateralization amount for that loan group is equal to the related
overcollateralization target amount, but only until the total
overcollateralization amount equals the total overcollateralization target
amount;
o on and after the payment date in January 2004, if the total
overcollateralization amount is less than the total overcollateralization
target amount, from the excess spread from each loan group, to the related
funding account, until the total overcollateralization amount is equal to
the total overcollateralization target amount;
o from any remaining excess spread from the related loan group, to pay to the
holders of the certificates, the related additional balance increase
amount, if any;
o from any remaining amounts from the related loan group, to pay to the
enhancer any other amounts owed the enhancer under the insurance agreement;
o from any remaining excess spread from each loan group, to pay to the
holders of the related notes, any unpaid interest shortfalls on the related
notes due to the limitation on the note rate by the applicable net WAC
rate, with interest thereon;
o from any remaining excess spread from either loan group, to pay an amount
equal to the additional balance increase amount for either loan group to
the holders of the certificates;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
o to pay any remaining amount to the holders of the certificates.
DURING THE RELATED MANAGED AMORTIZATION PERIOD, AFTER THE PAYMENTS DESCRIBED
ABOVE under "DURING THE REVOLVING PERIODS, MANAGED AMORTIZATION PERIODS AND
RAPID AMORTIZATION PERIOD":
o from remaining net principal collections from the related loan group, to
pay to the holders of the certificates, the related additional balance
increase amount, if any;
o from any remaining amounts from the related loan group, to pay principal on
the related notes in an amount equal to the related principal distribution
amount, which includes liquidation loss amounts to the extent described in
this prospectus supplement, until the note balance of those notes has been
reduced to zero;
o from the excess spread from a loan group for payment to the other loan
group, the aggregate amount of liquidation loss amounts included in the
principal distribution amount of that other loan group, to the extent not
previously paid, until the note balance of those notes has been reduced to
zero;
o if the note balance of all of the classes of notes related to a loan group
has been reduced to zero, from any remaining amounts related to the
mortgage loans in that loan group, any remaining principal distribution
amount for that loan group for payment to the holders of the notes related
to the other loan group, until the
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note balance of those notes has been reduced to zero;
o from any remaining amounts from the related loan group, to reimburse the
enhancer for prior related draws made on the policy, other than with
respect to payments of interest on the related notes, with interest
thereon, as provided in the insurance agreement;
o on and after the payment date in January 2004, from excess spread from each
loan group, to pay principal on the related notes until the
overcollateralization amount for that loan group is equal to the related
overcollateralization target amount, but only until the total
overcollateralization amount equals the total overcollateralization target
amount;
o on and after the payment date in January 2004, if the total
overcollateralization amount is less than the total overcollateralization
target amount, from the excess spread from each loan group, to pay
principal on the related notes, until the total overcollateralization
amount is equal to the total overcollateralization target amount;
o from any remaining excess spread from each loan group, to pay to the
holders of the certificates, the related additional balance increase
amount, if any;
o from any remaining amounts from the related loan group, to pay to the
enhancer any other amounts owed the enhancer under the insurance agreement;
o from any remaining excess spread from either loan group, to pay to the
holders of the related notes, any unpaid interest shortfalls on the related
notes due to the limitation on the note rate by the applicable net WAC
rate, with interest thereon;
o from any remaining excess spread from either loan group, to pay an amount
equal to the additional balance increase amount for either loan group to
the holders of the certificates;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
o to pay any remaining amount to the holders of the certificates.
DURING THE RAPID AMORTIZATION PERIOD, AFTER THE PAYMENTS DESCRIBED ABOVE UNDER
"DURING THE REVOLVING PERIODS, MANAGED AMORTIZATION PERIODS AND RAPID
AMORTIZATION PERIOD":
o from any remaining amounts from the related loan group, to pay principal on
the related notes in an amount equal to the related principal distribution
amount, which includes liquidation loss amounts to the extent described in
this prospectus supplement, until the note balance of those notes has been
reduced to zero;
o from the excess spread from a loan group for payment to the other loan
group, the aggregate amount of liquidation loss amounts included in the
principal distribution amount of that other loan group, to the extent not
previously paid, until the note balance of those notes has been reduced to
zero;
o if the note balance of all of the classes of notes related to a loan group
have been reduced to zero, from any remaining amounts related to the
mortgage loans in
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that loan group, any remaining principal distribution amount for that loan
group for payment to the holders of the notes related to the other loan
group, until the note balance of those notes has been reduced to zero;
o from principal collections, to pay to the holders of the certificates, the
related additional balance increase amount, if any;
o from any remaining amounts from the related loan group, to reimburse the
enhancer for prior related draws made on the policy, other than with
respect to payments of interest on the related notes, with interest
thereon, as provided in the insurance agreement;
o on and after the payment date in January 2004, from excess spread from each
loan group, to pay principal on the related notes until the
overcollateralization amount for that loan group is equal to the related
overcollateralization target amount, but only until the total
overcollateralization amount equals the total overcollateralization target
amount;
o on and after the payment date in January 2004, if the total
overcollateralization amount is less than the total overcollateralization
target amount, from the excess spread from each loan group, to pay
principal on the related notes, until the total overcollateralization
amount is equal to the total overcollateralization target amount;
o from any remaining excess spread from each loan group, to pay to the
holders of the certificates, the related additional balance increase
amount, if any;
o from any remaining amounts from the related loan group, to pay to the
enhancer any other amounts owed the enhancer under the insurance agreement;
o from any remaining excess spread from each loan group, to pay to the
holders of the related notes, any unpaid interest shortfalls on the related
notes due to the limitation on the note rate by the applicable net WAC
rate, with interest thereon;
o from any remaining excess spread from either loan group, to pay an amount
equal to the additional balance increase amount for either loan group to
the holders of the certificates;
o from any remaining amounts, to pay to the indenture trustee or the paying
agent, as applicable, any unpaid amounts owed to such party under the
indenture; and
o to pay any remaining amount to the holders of the certificates.
The portion of principal collections available to be applied towards the payment
of principal on the notes will equal:
o at any time during the revolving period, zero;
o at any time during the managed amortization period, principal collections
on the mortgage loans in the related loan group for that payment date that
are not used to acquire additional balances or to pay any additional
balance increase amount; and
o at any time during the rapid amortization period, principal collections on
the mortgage loans in the related loan group for that payment date.
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During the revolving periods, principal collections will be applied to purchase
additional balances and/or subsequent mortgage loans, to the extent available,
and will also be applied to pay any amounts in respect of any related additional
balance increase amount. During the managed amortization periods, principal
collections will continue to be used to purchase additional balances, to the
extent available, and will also be applied to pay any amounts in respect of any
related additional balance increase amount. Principal collections will not be
applied to acquire additional balances after the end of the managed amortization
periods.
In addition, on each payment date after the end of the related revolving period,
to the extent of funds available for that purpose, holders of the related notes
will be entitled to receive certain additional amounts in reduction of their
note balance, generally equal to amounts necessary to increase the
overcollateralization amount to the overcollateralization target amount, as
described in this prospectus supplement, and any unfunded liquidation loss
amounts.
Each revolving period will be the period beginning on the closing date and
ending on the earliest of June 30, 2004, the occurrence of a managed
amortization event, or the occurrence of a rapid amortization event.
Each managed amortization period will be the period beginning on the first day
following the end of the revolving period for the related loan group and ending
on the earlier of June 30, 2006 and the occurrence of a rapid amortization
event; and the rapid amortization period will be the period beginning on the
earlier of the first day following the end of the managed amortization period
for the related loan group and the occurrence of a rapid amortization event, and
ending upon the termination of the issuer. A managed amortization event, (i)
with respect to the revolving period related to loan group I, will be deemed to
occur on any date on which the amount on deposit in the group I funding account
equals or exceeds $20,000,000 and (ii) with respect to the revolving period
related to loan group II, will be deemed to occur on any date on which the
amount on deposit in the group II funding account equals or exceeds $42,500,000.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--PRIORITY OF DISTRIBUTIONS" IN
THIS PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF EVENTS THAT WOULD CAUSE EITHER
OF THE AMORTIZATION PERIODS TO BEGIN.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the noteholders will consist
of:
o excess interest;
o overcollateralization;
o cross-collateralization from mortgage loans in the other loan group, to the
extent described in this prospectus supplement; and
o the financial guaranty insurance policy.
WE REFER YOU TO "THE ENHANCER" AND "DESCRIPTION OF THE POLICY" IN THIS
PROSPECTUS SUPPLEMENT.
OPTIONAL REDEMPTION
A principal payment may be made to redeem the notes upon the exercise by the
servicer of its option to purchase the mortgage loans after the aggregate note
balance of the notes is reduced to an amount less than 10% of the initial
aggregate note balance of the notes. The purchase price
S-16
payable by the servicer for the mortgage loans will be the sum of:
o the aggregate outstanding principal balance of the mortgage loans, plus
accrued and unpaid interest thereon at the weighted average of the net loan
rates of the mortgage loans through the day preceding the payment date of
purchase, and the fair market value of real estate acquired by foreclosure;
o an amount equal to any unpaid interest shortfalls on the notes due to the
applicable net WAC rate plus accrued and unpaid interest on these interest
shortfalls; and
o all amounts due and owing the enhancer.
WE REFER YOU TO "DESCRIPTION OF THE SECURITIES--MATURITY AND OPTIONAL
REDEMPTION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS" IN THE ATTACHED
PROSPECTUS FOR FURTHER INFORMATION.
ERISA CONSIDERATIONS
The notes are eligible for purchase by pension, profit-sharing or other employee
benefit plans as well as individual retirement accounts and Keogh plans.
However, any fiduciary or other investor of assets of a plan that proposes to
acquire or hold the notes on behalf of or with assets of any plan should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended, to the
proposed investment.
WE REFER YOU TO "ERISA CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE
ATTACHED PROSPECTUS FOR FURTHER INFORMATION.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Orrick, Herrington & Sutcliffe LLP, special tax counsel to the
depositor, for federal income tax purposes, the notes will be characterized as
indebtedness, and neither the issuer, nor any portion of the issuer as created
and governed pursuant to the terms and conditions of the trust agreement, will
be characterized as an association, or a publicly traded partnership, taxable as
a corporation for federal income tax purposes, or as a "taxable mortgage pool"
within the meaning of Section 7701(i) of the Internal Revenue Code of 1986, as
amended. In addition, each noteholder, by its acceptance of a note, will agree
to treat that note as debt for federal, state and local tax purposes.
FOR FURTHER INFORMATION REGARDING MATERIAL INCOME TAX CONSIDERATIONS IN RESPECT
OF AN INVESTMENT IN THE NOTES, WE REFER YOU TO "MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS" AND "STATE AND OTHER TAX CONSEQUENCES" IN THIS PROSPECTUS
SUPPLEMENT AND "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" AND "STATE AND OTHER
TAX CONSEQUENCES" IN THE ATTACHED PROSPECTUS.
S-17
RATINGS
It is a condition to the issuance of the notes that they receive the ratings
shown on page S-6 of this prospectus supplement. A security rating is not a
recommendation to buy, sell or hold securities, and may be subject to revision
or withdrawal at any time by the assigning rating organization. A security
rating does not address the frequency of prepayments of or draws on the mortgage
loans, the likelihood of the receipt of any amounts in respect of interest
shortfalls or any corresponding effect on the yield to investors.
The ratings will not address the likelihood that required payments will be made
by the provider of the yield maintenance agreements.
WE REFER YOU TO "YIELD AND PREPAYMENT CONSIDERATIONS" AND "RATINGS" IN THIS
PROSPECTUS SUPPLEMENT FOR FURTHER INFORMATION.
S-18
RISK FACTORS
THE NOTES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS. IN
PARTICULAR, YOU SHOULD NOT PURCHASE THE NOTES UNLESS YOU UNDERSTAND THE
PREPAYMENT, CREDIT, LIQUIDITY AND MARKET RISKS ASSOCIATED WITH THE NOTES.
THE NOTES ARE COMPLEX SECURITIES. YOU SHOULD POSSESS, EITHER ALONE OR
TOGETHER WITH AN INVESTMENT ADVISOR, THE EXPERTISE NECESSARY TO EVALUATE THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IN THE CONTEXT OF YOUR FINANCIAL SITUATION AND TOLERANCE FOR RISK.
YOU SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE FOLLOWING
FACTORS IN CONNECTION WITH THE PURCHASE OF THE NOTES.
THE MORGAGED PROPERTIES MIGHT NOT BE ADEQUATE SECURITY FOR THE MORTGAGE LOANS.
Although the mortgage loans are secured by liens on mortgaged properties, this
collateral may not give assurance of repayment of the mortgage loans comparable.
to the assurance of repayment that many first lien lending programs provide, and
the mortgage loans, especially those with high combined loan-to-value ratios,
may have risk of repayment characteristics more similar to unsecured consumer
loans.
Approximately 44.09% and 1.02% (by aggregate principal balance as of the cut-off
date) of the initial mortgage loans in loan group I, and approximately 57.77%
and 1.21% (by aggregate principal balance as of the cut-off date) of the initial
mortgage loans in loan group II, are secured by second and third mortgages,
respectively, that are subordinate to the rights of the mortgagee under a senior
mortgage or mortgages. The proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding principal
balance of these mortgage loans only to the extent that the claims of the senior
mortgages have been satisfied in full, including any related foreclosure costs.
If the servicer determines that it would be uneconomical to foreclose on the
related mortgaged property, the servicer may write off the entire outstanding
principal balance of the related mortgage loan. These considerations will be
particularly applicable to mortgage loans secured by second or third mortgages
that have high combined loan-to-value ratios because, in these cases, the
servicer is more likely to determine that foreclosure would be uneconomical.
These losses will be borne by the noteholders if the applicable credit
enhancement is insufficient to absorb them.
Defaults on mortgage loans are generally expected to occur with greater
frequency in their early years. The rate of default of mortgage loans secured by
junior mortgages may be greater than that of mortgage loans secured by senior
mortgages on comparable properties.
S-19
We cannot assure you that the values of the mortgaged properties have remained
or will remain at their levels on the dates of origination of the related
mortgage loans. If the residential real estate market experiences an overall
decline in value, this could extinguish the value of the interest of a junior
mortgagee in the mortgaged property before having any adverse effect on the
interest of the related senior mortgagees.
DEPENDENCY ON THE
CREDITWORTHINESS OF THE
MORTGAGORS.
As a result of the above considerations, the procedures applicable to the
mortgage loans, of the mortgage loans, may be more dependent borrower and less
dependent on the adequacy of the mortgaged property as collateral than would be
the case under many first lien lending programs. Future adverse changes in the
borrower's economic circumstances may have a significant effect on the
likelihood of repayment, since additional draws on the mortgage loans may be
made by the borrower in the future up to the applicable credit limit. Although
the mortgage loans are generally subject to provisions whereby the servicer may
reduce the applicable credit limit as a result of a material adverse change in
the borrower's economic circumstances, the servicer generally will not monitor
for these changes and may not become aware of them until after the borrower has
defaulted. Under certain circumstances, a borrower with a mortgage loan may draw
his entire credit limit in response to personal financial needs resulting from
an adverse change in circumstances.
Under the home equity program of the seller relating to the mortgage loans, the
seller generally qualifies mortgagors based on an assumed payment that reflects
a loan rate significantly lower than the related maximum loan rate. The
repayment of any mortgage loan may thus be dependent on the ability of the
related mortgagor to make larger interest payments if the loan rate of the
related mortgage loan is adjusted during the life of the mortgage loan.
Future changes in a borrower's economic circumstances may result from a variety
of unforeseeable personal factors, including loss of employment, reduction in
income, illness and divorce. Any increase in prevailing market interest rates
may adversely affect a borrower by increasing debt service on the related
mortgage loan or other similar debt of the borrower. In addition, changes in the
payment terms of any related senior mortgage loan may adversely affect the
borrower's ability to pay principal and interest on the senior mortgage loan.
For example, these changes may result if the senior mortgage loan is an
adjustable rate loan and the interest rate on the loan increases, which may
occur with or without an increase in prevailing market interest rates if the
increase is due to the phasing out of a reduced initial rate. Specific
information about these senior mortgage loans, other than
S-20
the amount of these loans at origination of the corresponding mortgage loan, is
not available, and we are not including it in this prospectus supplement.
General economic conditions, both on a national and regional basis, will also
have an impact on the ability of borrowers to repay their mortgage loans.
Certain geographic regions of the United States from time to time will
experience weaker regional economic conditions and housing markets, and, as a
result, will experience higher rates of loss and delinquency than mortgage loans
generally. For example, a region's economic condition and housing market may be
directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, power shortages, eruptions
or riots. The economic impact of any of these types of events may also be felt
in areas beyond the region immediately affected by the disaster or disturbance.
The mortgage loans may be concentrated in these regions, and this concentration
may present risk considerations in addition to those generally present for
similar mortgage-backed securities without this concentration. You should note
that approximately 22.16%, 21.24%, 16.02%, 15.58% and 11.84% (by aggregate
principal balance as of the cut-off date) of the mortgage loans in loan group I
are secured by mortgaged properties located in the states of Florida, New
Jersey, Pennsylvania, North Carolina and Virginia, and approximately 20.62%,
19.61%, 13.09% and 12.02% (by aggregate principal balance as of the cut-off
date) of the mortgage loans in loan group II are secured by mortgaged properties
located in the states of New Jersey, Florida, North Carolina and Pennsylvania,
respectively.
In addition, any change in the deductibility for federal income tax purposes of
interest payments on home equity loans such as the mortgage loans may also have
an adverse impact on the ability of borrowers to repay their mortgage loans.
THE APPLICATION OF THE NET WAC
RATE MAY REDUCE THE NOTE RATE ON
THE NOTES.
The note rate on the Class A-I-1 and the Class A-II-1 notes will be a floating
rate based on LIBOR, generally limited by the applicable net WAC rate.
The note rate on the Class A-II-2 notes is subject to adjustment monthly
pursuant to the auction procedures described in Annex I to this prospectus
supplement. Since the note rate on the Class A-II-2 notes may be capped by the
applicable net WAC rate, the yield to the holders of the Class A-II-2 notes may
be lower than a yield based upon the auction procedures. The note rate on the
Class A-II-2 notes will also be capped by the maximum auction rate, which will
equal LIBOR plus 0.40% per annum or, if the Class A-II-2 notes are rated less
than "AAA" and "Aaa" by Standard & Poor's and Moody's respectively, LIBOR plus
1.25% per annum. However, in no event
S-21
will the maximum auction rate on the Class A-II-2 notes exceed the lesser of the
applicable net WAC rate or 15.00% per annum. In addition, if the Class A-II-2
notes are no longer held in book-entry form, the Class A-II-2 notes will no
longer be offered and sold pursuant to the auction procedures and the note rate
for the Class A-II-2 notes will be equal to the lesser of the maximum auction
rate or the applicable net WAC rate. If there are not sufficient bids for the
Class A-II-2 notes at a rate at which the holder of the Class A-II-2 notes would
desire to sell, the holder will be required to hold their Class A-II-2 notes for
an indefinite period of time.
The loan rates of the mortgage loans in both loan groups adjust based on the
prime rate. As such, if LIBOR rises and the prime rate decreases or does not
increase as fast as LIBOR, the holders of the notes could receive interest at a
rate less than LIBOR plus the specified margin due to these limitations on the
note rate. In addition, the weighted average loan rate of the mortgage loans
will change, and may decrease over time due to scheduled amortization of the
mortgage loans, prepayments of mortgage loans, transfers to the depositor of
subsequent mortgage loans and removal of mortgage loans by the seller or
servicer. We cannot assure you that the weighted average loan rate of the
mortgage loans will not decrease after the date of initial issuance of the
notes.
The holders of the notes will be entitled to recover interest shortfalls, in
excess of the applicable net WAC rate cap, on any payment date from excess cash
flow from the related mortgage loans, if any, available for that purpose. No
assurance can be given that there will be excess cash flow available to make
such interest payments. The policy does not cover any interest shortfalls on the
notes that result from an application of the net WAC rate cap. The yield
maintenance agreements are intended to partially mitigate the interest rate risk
that could result from limitations on the note rate of the Class A-I-1 notes and
the Class A-II-1 notes, by the weighted average of the net loan rates on the
related mortgage loans. The Class A-II-2 notes will not be entitled to receive
payments under either yield maintenance agreement. The policy does not cover any
payments that are required to be made under the yield maintenance agreements. If
payments are not made as required under either yield maintenance agreement,
those amounts will only be paid if excess cash flow is available for that
purpose. Each yield maintenance agreement will terminate on the payment date
occurring in July 2008.
S-22
YIELD AND PREPAYMENT
CONSIDERATIONS ON THE NOTES.
The yield to maturity of notes will depend on the rate and timing of principal
payments, including payments in excess of required installments, prepayments or
terminations, liquidations and repurchases on the mortgage loans in the related
loan group, the rate and timing of draws on the mortgage loans in the related
loan group, and the price you pay for your notes. This yield may be adversely
affected by a higher or lower than anticipated rate of principal payments or
draws on the related mortgage loans. The mortgage loans may be prepaid in full
or in part without penalty. The rate and timing of defaults on the mortgage
loans will also affect the yield to maturity of the notes.
During the revolving period for a loan group, if the depositor does not sell
enough additional balances on the mortgage loans to the issuer or does not
purchase enough subsequent mortgage loans, the issuer will not fully apply
amounts on deposit in the funding account to the purchase of additional balances
on the mortgage loans or subsequent mortgage loans by the end of the revolving
period. These remaining amounts, after giving effect to the purchase by the
issuer of all additional balances and subsequent mortgage loans, including any
purchase on the date on which the revolving period ends, and payments to the
certificateholders in respect of any additional balance increase amount, will be
paid to the holders of the related notes on a pro rata basis as principal on the
first payment date following the end of the revolving period. SEE "YIELD AND
PREPAYMENT CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
LIMITATIONS ON THE REPURCHASE OR
REPLACEMENT OF DEFECTIVE
MORTGAGE LOANS BY THE SELLER.
We cannot assure you that, at any particular time, the seller will be able,
financially or otherwise, to repurchase or replace defective mortgage loans as
described in this prospectus supplement. Events relating to the seller and its
operations could occur that would adversely affect the financial ability of the
seller to repurchase defective mortgage loans from the issuer, including the
termination of borrowing arrangements that provide the seller with funding for
its operations, or the sale or other disposition of all or any significant
portion of the seller's assets. If the seller does not repurchase or replace a
defective mortgage loan, then the servicer, on behalf of the issuer, will try to
recover the maximum amount possible with respect to that defective mortgage
loan, and any resulting delay or loss will be borne by the noteholders, to the
extent that the credit enhancement does not cover this delay or loss.
MODIFICATION OF MORTGAGE LOANS
BY THE SERVICER.
In accordance with the servicing agreement, the servicer may grant the request
of a mortgagor of a mortgage loan to either:
o change the interest rate payable on the related mortgage loan;
o increase the credit limit on the related mortgage loan above the limit
stated in the related credit line agreement;
S-23
o refinance the existing senior lien or place a new senior lien related to a
mortgage loan resulting in a CLTV Ratio above the previous CLTV Ratio for
that loan; or
o make any other material modification to the related mortgage loan.
provided, however, that without the consent of the enhancer, the aggregate
amount of mortgage loans so modified may not exceed 5% of the aggregate
principal balance of the mortgage loans as of the cut-off date.
Any material change to the characteristics of a mortgage loan may affect the
timing and payments of amounts available from collections in respect of that
mortgage and cause shortfalls or delays in payments to noteholders. In addition,
any decrease in the interest rate on a mortgage loan will have the effect of
lowering the weighted average loan rate of the mortgage loans in a loan group
and may limit the pass-through rate on the related notes.
POSSIBLE VARIATIONS IN THE
SUBSEQUENT MORTGAGE LOANS FROM
THE INITIAL MORTGAGE LOANS.
Each subsequent mortgage loan will satisfy the eligibility criteria referred to
in this prospectus supplement at the time the depositor transfers it to the
issuer. However, if acceptable to the enhancer, the depositor may acquire
subsequent mortgage loans using credit criteria different from those it applied
to the initial mortgage loans. As such, these subsequent mortgage loans may be
of a different credit quality from the initial mortgage loans. Thus, after the
transfer of subsequent mortgage loans to the issuer, the aggregate
characteristics of the mortgage loans in a loan group may vary from those of the
initial mortgage loans in that loan group. SEE "DESCRIPTION OF THE MORTGAGE
LOANS--THE FUNDING ACCOUNT; CONVEYANCE OF ADDITIONAL BALANCES AND SUBSEQUENT
MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
LEGAL CONSIDERATIONS PRESENT
CERTAIN RISKS.
The mortgage loans are secured by mortgages. With respect to mortgage loans that
are secured by first mortgages, the servicer may, under certain circumstances,
agree to a new mortgage lien on the related mortgaged property having priority
over that mortgage. Mortgage loans secured by second or third mortgages are
entitled to proceeds that remain from the sale of the related mortgaged property
after any senior mortgage loans and prior statutory liens have been satisfied.
If these proceeds are insufficient to satisfy these senior loans and prior liens
in the aggregate, the issuer, and accordingly, the noteholders will bear the
risk of delay in distributions while the servicer obtains a deficiency judgment,
to the extent available in the related state, against the related mortgagor, and
also bear the risk of loss if the servicer cannot obtain or realize upon that
deficiency judgment. SEE "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS" IN THE
PROSPECTUS.
S-24
CERTAIN MATTERS RELATED TO
RECEIVERSHIP.
To the extent that the seller's transfer of the mortgage loans to the depositor
is deemed to constitute the creation of a security interest in the mortgage
loans in favor of the depositor, and to the extent such security interest was
validly perfected before the seller's insolvency and was not taken in
contemplation of insolvency of the seller, or with the intent to hinder, delay
or defraud the seller or the creditors of the seller, the Federal Deposit
Insurance Act, as amended by FIRREA, known as the FDIA, provides that such
security interest should not be subject to avoidance by the FDIC, as receiver or
conservator for the seller. Even if the FDIC cannot avoid a legally enforceable
and perfected security interest, it may nonetheless repudiate such security
interest. If the FDIC did repudiate an unavoidable security interest, it would
be liable for statutory damages provided in the FDIA. Such damages are generally
limited to actual compensatory damages determined as of the date the FDIC is
appointed as conservator or receiver.
In addition, if the FDIC were appointed as receiver or conservator for the
seller, the FDIC would also have the power under the FDIA to repudiate
contracts, including the seller's obligations under the purchase agreement to
repurchase certain mortgage loans which do not conform to the seller's
representations and warranties. The non-conforming mortgage loans could suffer
losses which could result in losses on the notes.
In addition, in the case of an event of default relating to the receivership,
conservatorship or insolvency of the servicer, the receiver or conservator may
have the power either to terminate the servicer and replace it with a successor
servicer or to prevent the termination of the servicer and its replacement with
a successor servicer if no event of default exists other than the receivership,
conservatorship or insolvency of the servicer. Any interference with the
termination of the servicer or appointment of a successor servicer could result
in a delay in payments to the holders of the notes.
LIMITATIONS OF, AND THE POSSIBLE
REDUCTION AND SUBSTITUTION OF,
CREDIT ENHANCEMENT.
Credit enhancement will be provided for the notes in the form of:
o excess interest collections from the mortgage loans, if available;
o overcollateralization and cross-collateralization, to the extent described
in this prospectus supplement; and
o the policy, to the limited extent described in this prospectus supplement.
None of the seller, the depositor, the servicer, the paying agent, the indenture
trustee or any of their respective affiliates will be required to take any other
action to maintain, or have any obligation to replace or supplement, this credit
enhancement or any rating of the notes. To the extent that losses are incurred
on the mortgage loans that are not covered by excess interest collections,
overcollateralization, cross-
S-25
collateralization (to the extent described in this prospectus supplement) or the
policy, securityholders, including the holders of the notes, will bear the risk
of those losses.
SOCIAL, ECONOMIC AND OTHER
FACTORS COULD AFFECT THE
PURCHASE OF SUBSEQUENT
MORTGAGE LOANS.
The ability of the issuer to purchase subsequent mortgage loans is largely
dependent upon whether mortgagors perform their payment and other obligations
required by the related mortgage loans in order that those mortgage loans meet
the specified requirements for transfer on a subsequent transfer date as a
subsequent mortgage loan. The performance by these mortgagors may be affected as
a result of a variety of social and economic factors. Economic factors include
interest rates, unemployment levels, the rate of inflation and consumer
perception of economic conditions generally. However, we cannot predict whether
or to what extent economic or social factors will affect the performance by the
related mortgagors and the availability of subsequent mortgage loans.
LIMITED LIQUIDITY OF THE NOTES
MAY LIMIT THE ABILITY TO SELL
THE NOTES OR REALIZE A DESIRED
YIELD.
A secondary market for the notes may not develop. Even if a secondary market
does develop, it might not provide you with liquidity of investment or continue
for the life of the notes. Neither the underwriters nor any other person will
have any obligation to make a secondary market in the notes. Illiquidity means
investors may not be able to find a buyer for the notes readily or at prices
that will enable them to realize a desired yield. Illiquidity can have a severe
adverse effect on the market value of the notes.
THE LIMITED ASSETS OF
THE TRUST FUND FOR MAKING
PAYMENTS ON THE NOTES MAY
NOT BE SUFFICIENT TO
DISTRIBUTE ALL PAYMENTS
DUE ON THE NOTES.
The notes will be payable solely from the assets of the trust fund. There can be
no assurance that the market value of the assets in the trust fund will be equal
to or greater than the total principal amount of the notes outstanding, plus
accrued interest. Moreover, if the assets of the trust fund are ever sold, the
sale proceeds will be applied first to reimburse the indenture trustee,
servicer, paying agent and enhancer for their unpaid fees and expenses before
any remaining amounts are distributed to noteholders.
In addition, at the times specified in this prospectus supplement, mortgage
loans may be released to the holders of the certificates. Once released, those
assets will no longer be available to make payments to noteholders.
You will have no recourse against the depositor, the seller, the servicer, or
any of their affiliates, if any required distribution on the notes is not made
or for any other default. The only obligations of the seller with respect to the
trust fund or the notes would result from a breach of the representations and
warranties that the seller makes concerning the trust assets.
S-26
THE RETURN ON YOUR NOTES COULD
BE REDUCED BY SHORTFALLS DUE TO
THE SOLDIERS' AND SAILORS' CIVIL
RELIEF ACT
The Soldiers' and Sailors' Civil Relief Act of 1940, or Relief Act, provides
relief to borrowers who enter active military service and to borrowers in
reserve status who are called to active duty after the origination of their
mortgage loan.
The Relief Act provides generally that a borrower who is covered by the Relief
Act may not be charged interest on a mortgage loan in excess of 6% per annum
during the period of the borrower's active duty. Any resulting interest
shortfalls are not required to be paid by the borrower at any future time.
THE SERVICER IS NOT REQUIRED TO ADVANCE THESE SHORTFALLS AS DELINQUENT PAYMENTS
AND THE SHORTFALLS ARE NOT COVERED BY THE POLICY.
Interest shortfalls on the mortgage loans due to the application of the Relief
Act or similar legislation or regulations will not be paid by excess interest or
otherwise on any payment date.
The Relief Act also limits the ability of the servicer to foreclose on a
mortgage loan during the borrower's period of active duty and, in some cases,
during an additional three month period thereafter. As a result, there may be
delays in payment and increased losses on the mortgage loans.
We do not know how many mortgage loans have been or may be affected by the
application of the Relief Act or similar legislation or regulations. SEE
"CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS--SOLDIERS' AND SAILORS' CIVIL RELIEF
ACT OF 1940 AND SIMILAR LAWS" IN THE PROSPECTUS.
CONSEQUENCES OF OWNING
BOOK-ENTRY NOTES.
LIMIT ON LIQUIDITY OF NOTES. Issuance of the offered notes in book-entry form
may reduce the liquidity of such notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the book-entry
notes can be effected only through certain depositories, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry note to persons or entities that are not affiliated with
these organizations or otherwise to take actions in respect of such notes, may
be limited due to lack of a physical note representing the book-entry notes.
DELAYS IN PAYMENTS. You may experience some delay in the receipt of payments on
the book-entry notes since the payments will be forwarded by the paying agent to
a depository to credit the accounts of its participants which will thereafter
credit them to your account either directly or indirectly through indirect
participants, as applicable. WE REFER YOU TO "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY NOTES" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
S-27
INTRODUCTION
The trust fund will be formed under the trust agreement, to be dated as
of the closing date, between the depositor and the owner trustee. The issuer
will issue $1,250,000,000 of Wachovia Asset Securitization, Inc. Asset-Backed
Notes, Series 2003-HE2. These notes will be issued under the indenture, to be
dated as of the closing date, between the issuer, the indenture trustee and the
paying agent. Under the trust agreement, the issuer will issue the Wachovia
Asset Securitization, Inc. Asset-Backed Certificates, Series 2003-HE2. The notes
and the certificates are collectively referred to in this prospectus supplement
as the securities. Only the notes are offered by this prospectus supplement.
On the closing date, the depositor will deposit into the trust fund two
groups of mortgage loans that, in the aggregate, will constitute a mortgage
pool. All of the initial mortgage loans will be sold by the seller to the
depositor, pursuant to the mortgage loan purchase agreement, referred to in this
prospectus supplement as the purchase agreement. The depositor will then
transfer the initial mortgage loans to the trust pursuant to the trust
agreement. The trust will be entitled to all payments of principal and interest
in respect of the mortgage loans received on or after the cut-off date, other
than amounts that relate to additional balances that are not conveyed to the
trust fund.
We have defined certain significant terms in the section titled
"Description of the Securities--Glossary of Terms" in this prospectus
supplement. Capitalized terms used in this prospectus supplement but not defined
in this prospectus supplement shall have the meanings assigned to them in the
accompanying prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this prospectus supplement
relates to the mortgage loans conveyed to the trust fund on the closing date, or
the initial mortgage loans. Unless otherwise indicated, all percentages set
forth in this prospectus supplement are approximate and are based upon the
aggregate principal balance of the initial mortgage loans as of the cut-off
date. The "principal balance" of a mortgage loan, other than a liquidated
mortgage loan, on any day is equal to the principal balance of that mortgage
loan as of the cut-off date or, in the case of a subsequent mortgage loan, the
related subsequent cut-off date, plus (1) any additional balances in respect of
that mortgage loan conveyed to the trust fund, minus (2) all collections
credited against the principal balance of that mortgage loan in accordance with
the related credit line agreement prior to that day. The "principal balance" of
a liquidated mortgage loan after final recovery of substantially all of the
related liquidation proceeds which the servicer reasonably expects to receive
will be zero. The mortgage loans will be Revolving Credit Line Loans (as
described in the accompanying prospectus).
Mortgage loans conveyed to the trust fund after the closing date, or
subsequent mortgage loans, will be selected using generally the same criteria as
that used to select the initial mortgage loans, and generally the same
representations and warranties will be made with respect thereto. See
"Description of the Mortgage Loans--The Funding Account; Conveyance of
Additional Balances and Subsequent Mortgage Loans" in this prospectus
supplement.
The initial mortgage loans conveyed to the trust on the closing date
will be divided into two loan groups as follows:
(1) loan group I, or group I loans, will consist of first lien
mortgage loans that have a credit limit that is less than or equal
to $322,700 and junior lien mortgage loans for which
S-28
(i) the sum of the credit limit and the principal balances of any
related senior loans is less than or equal to $322,700 and (ii)
the credit limit is less than or equal to $161,350.
Any subsequent mortgage loans that are included in loan group I
will also satisfy the above requirements.
(2) loan group II, or group II loans, will include mortgage loans that
do and mortgage loans that do not meet the restrictions applicable
to loan group I. In addition, loan group II will include any
mortgage loans subsequently transferred to the trust that are not
included in loan group I.
Principal payments on the Class A-I-1 notes will be made from amounts
collected or received in respect of the mortgage loans in loan group I, while
principal payments on the Class A-II notes will be made from amounts collected
or received in respect of the mortgage loans in loan group II. In addition, each
loan group will receive the benefit of the cross-collateralization to the extent
described in this prospectus supplement. See "Description of the
Securities--Priority of Distributions" in this prospectus supplement.
INITIAL MORTGAGE LOANS
All of the initial mortgage loans were originated by the seller, and
were originated generally in accordance with the underwriting standards of the
seller. Approximately 44.09% and 1.02% (by aggregate principal balance as of the
cut-off date) of the initial mortgage loans in loan group I are secured by
second or third mortgages or deeds of trust, respectively, and the remainder are
secured by first mortgages or deeds of trust. Approximately 57.77% and 1.21% (by
aggregate principal balance as of the cut-off date) of the initial mortgage
loans in loan group II are secured by second or third mortgages or deeds of
trust, respectively, and the remainder are secured by first mortgages or deeds
of trust. The mortgaged properties securing the initial mortgage loans consist
of residential properties. With respect to approximately 89.46% and 5.68% of the
initial mortgage loans in loan group I (by aggregate principal balance as of the
cut-off date), the borrower represented at the time of origination that the
related mortgaged property would be owner occupied as a primary home or second
home, respectively. With respect to approximately 88.17% and 7.63% of the
initial mortgage loans in loan group II (by aggregate principal balance as of
the cut-off date), the borrower represented at the time of origination that the
related mortgaged property would be owner occupied as a primary home or second
home, respectively.
All percentages of the initial mortgage loans described in this
prospectus supplement are approximate percentages determined, except as
otherwise indicated, by the aggregate principal balance as of the cut-off date
of the initial mortgage loans.
The principal balance as of the cut-off date of the initial mortgage
loans in loan group I is approximately $400,000,034. With respect to the initial
mortgage loans in loan group I:
o as of the cut-off date, no initial mortgage loan is 30 days or
more delinquent;
o the average principal balance as of the cut-off date is
$43,006.13;
o the minimum principal balance as of the cut-off date is $5,011.94;
o the maximum principal balance as of the cut-off date is
$308,322.43;
o the lowest and the highest loan rate on the cut-off date are
3.490% and 6.850% per annum, respectively;
o the weighted average loan rate on the cut-off date is 4.276% per
annum;
o the lowest and the highest fully indexed loan rate on the cut-off
date are 3.490% and 9.000% per annum, respectively;
S-29
o the weighted average fully indexed loan rate on the cut-off date
is 4.455% per annum;
o the minimum and maximum CLTV Ratios as of the cut-off date are
2.00% and 100.00%, respectively;
o the weighted average CLTV Ratio as of the cut-off date is 77.46%;
o all of the mortgage loans have an original term to maturity of 40
years and no mortgage loan is scheduled to mature later than May
23, 2043;
o the latest scheduled draw term expiration is May 23, 2023; and
o with respect to 22.16%, 21.24%, 16.02%, 15.58% and 11.84% of the
initial mortgage loans in loan group I, the related mortgaged
properties are located in the states of Florida, New Jersey,
Pennsylvania, North Carolina, and Virginia, respectively.
The principal balance as of the cut-off date of the initial mortgage
loans in loan group II is approximately $850,033,297. With respect to the
initial mortgage loans in loan group II:
o as of the cut-off date, no initial mortgage loan is 30 days or
more delinquent;
o the average principal balance as of the cut-off date is
$58,457.69;
o the minimum principal balance as of the cut-off date is $5,000.91;
o the maximum principal balance as of the cut-off date is
$2,215,858.25;
o the lowest and the highest loan rate on the cut-off date are
3.000% and 7.000% per annum, respectively;
o the weighted average loan rate on the cut-off date is 4.273% per
annum;
o the lowest and the highest fully indexed loan rate on the cut-off
date are 3.000% and 9.000% per annum, respectively;
o the weighted average fully indexed loan rate on the cut-off date
is 4.424% per annum;
o the minimum and maximum CLTV Ratios as of the cut-off date are
4.00% and 100.00%, respectively;
o the weighted average CLTV Ratio as of the cut-off date is 77.48%;
o all of the mortgage loans have an original term to maturity of 40
years and no mortgage loan is scheduled to mature later than May
27, 2043;
o the latest scheduled draw term expiration is May 27, 2023; and
o with respect to 20.62%, 19.61%, 13.09% and 12.02% of the initial
mortgage loans in loan group II, the related mortgaged properties
are located in the states of New Jersey, Florida, North Carolina
and Pennsylvania, respectively.
As used in this prospectus supplement, a mortgage loan is considered to
be "30 to 59 days" or "30 or more days" delinquent when a payment due on any due
date remains unpaid as of the close of business on the next following monthly
due date. However, since the determination as to whether a mortgage loan falls
into this category is made as of the close of business on the last business day
of each month, a mortgage loan with a payment due on June 1 that remained unpaid
as of the close of business on June 30 would still be considered current as of
June 30. If that payment remained unpaid as of the close of business on July 31,
the mortgage loan would then be considered to be 30 to 59 days delinquent.
Delinquency information presented in this prospectus supplement as of the
cut-off date is determined and prepared as of the close of business on the last
business day immediately prior to the cut-off date.
S-30
INITIAL MORTGAGE LOAN CHARACTERISTICS
Set forth below is a description of certain characteristics of the
initial mortgage loans in loan group I and loan group II as of the cut-off date.
Unless otherwise specified, all principal balances of the initial mortgage loans
are as of the cut-off date. All percentages are approximate percentages by
aggregate principal balance as of the cut-off date (except as indicated
otherwise) and may not sum to 100% due to rounding.
INITIAL MORTGAGE LOAN CHARACTERISTICS FOR LOAN GROUP I
CURRENT LOAN RATES - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CURRENT LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------ ---------------------
3.490% to 4.000% 1,724 $109,052,693.52 27.26%
4.001% to 4.250% 6,140 245,466,376.16 61.37
4.251% to 4.500% 11 269,395.57 0.07
4.501% to 4.750% 12 207,610.83 0.05
4.751% to 5.000% 38 3,367,189.36 0.84
5.001% to 6.000% 1,363 41,390,406.86 10.35
6.001% to 6.850% 13 246,361.46 0.06
- --------------------------------------------- ------------------ ------------------------ ---------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o The weighted average current loan rate of the initial Group I loans as of
the cut-off date is approximately 4.276%.
JUNIOR RATIOS - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ---------------------
First Lien 3,309 $219,573,619.35 54.89%
3.31 to 10.00 285 3,615,243.85 0.90
10.01 to 20.00 1,508 30,346,883.55 7.59
20.01 to 30.00 1,310 34,904,288.62 8.73
30.01 to 40.00 968 32,201,340.45 8.05
40.01 to 50.00 723 29,165,495.39 7.29
50.01 to 60.00 422 18,592,544.89 4.65
60.01 to 70.00 321 14,547,209.35 3.64
70.01 to 80.00 216 7,794,025.51 1.95
80.01 to 90.00 143 5,504,404.97 1.38
90.01 to 100.00 96 3,754,977.83 0.94
- --------------------------------------------- ------------------ ------------------------- ---------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= =====================
o The junior ratio of a mortgage loan is the ratio (expressed as a
percentage) of the credit limit of that mortgage loan to the sum of such
credit limit and the principal balance of any related senior mortgage loan
at origination of that mortgage loan.
o The weighted average junior ratio of the initial Group I loans that are
secured by second or third liens on the mortgaged properties as of the
cut-off date is approximately 39.78%.
S-31
COMBINED LOAN-TO-VALUE RATIOS - GROUP I LOANS
PERCENTAGE OF INITIAL
GROUP I LOANS
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
2.00 to 10.00 16 $357,205.96 0.09%
10.01 to 20.00 135 4,504,224.82 1.13
20.01 to 30.00 220 7,845,448.22 1.96
30.01 to 40.00 302 13,056,578.31 3.26
40.01 to 50.00 426 21,756,767.21 5.44
50.01 to 60.00 580 27,948,670.56 6.99
60.01 to 70.00 827 41,600,513.94 10.40
70.01 to 80.00 1,115 55,641,722.91 13.91
80.01 to 90.00 3,722 156,535,240.25 39.13
90.01 to 100.00 1,958 70,753,661.58 17.69
- --------------------------------------------- ------------------ ------------------------- ---------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= =====================
o The minimum and maximum combined loan-to-value ratios of the initial
mortgage loans as of the cut-off date are approximately 2.00% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group I loans as of the cut-off date is approximately 77.46%.
PRINCIPAL BALANCES - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
5,011.94 to 10,000.00 1,016 $7,947,422.17 1.99%
10,000.01 to 20,000.00 2,166 32,435,100.55 8.11
20,000.01 to 30,000.00 1,723 42,777,656.93 10.69
30,000.01 to 40,000.00 1,096 38,108,779.75 9.53
40,000.01 to 50,000.00 762 34,411,237.46 8.60
50,000.01 to 75,000.00 1,063 65,149,284.08 16.29
75,000.01 to 100,000.00 699 61,981,793.90 15.50
100,000.01 to 150,000.00 492 60,890,861.74 15.22
150,000.01 to 200,000.00 172 29,788,493.64 7.45
200,000.01 to 250,000.00 89 20,163,080.64 5.04
250,000.01 to 300,000.00 21 5,731,792.32 1.43
300,000.01 to 308,322.43 2 614,530.58 0.15
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o The average principal balance of the initial Group I loans as of the
cut-off date is approximately $43,006.13.
S-32
MAXIMUM LOAN RATES - GROUP I LOANS
PERCENTAGE OF INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CURRENT LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
16.000 1,588 $63,581,973.42 15.90%
18.000 7,713 336,418,060.34 84.10
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
REMAINING DRAW TERM - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
REMAINING DRAW TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
110 to 114 118 $5,792,770.71 1.45%
115 to 120 220 9,704,706.55 2.43
223 to 228 1 27,837.01 0.01
229 to 234 2,750 118,790,348.66 29.70
235 to 239 6,212 265,684,370.83 66.42
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o The weighted average remaining draw term of the initial Group I loans as of
the cut-off date is approximately 231 months.
CREDIT SCORES AS OF THE DATE OF ORIGINATION - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT SCORES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Not Available 8 $663,000.67 0.17%
501 to 525 1 31,140.60 0.01
551 to 575 3 207,408.14 0.05
576 to 600 17 1,109,046.69 0.28
601 to 625 150 6,166,671.01 1.54
626 to 650 403 15,472,128.71 3.87
651 to 675 918 38,328,625.15 9.58
676 to 700 1,356 59,944,860.47 14.99
701 to 725 1,524 66,226,116.72 16.56
726 to 750 1,502 65,455,897.37 16.36
751 to 775 1,608 68,855,192.42 17.21
776 to 800 1,500 64,690,853.97 16.17
801 to 821 311 12,849,091.84 3.21
- --------------------------------------------- ------------------ ------------------------- --------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o Of the initial mortgage loans with available credit scores, the weighted
average credit score at origination of those Group I loans as of the
cut-off date is approximately 728.
S-33
DOCUMENTATION TYPE - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- -----------------------
No Income Documentation Required 7,353 $245,331,954.72 61.33%
1 YTD Pay Stub or 2 Years Tax Returns 1,822 149,289,467.52 37.32
1 YTD Pay Stub and Last W-2
or 2 Years' Tax Returns 126 5,378,611.52 1.34
- --------------------------------------------- ------------------ ------------------------- -----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= =======================
LOAN PURPOSE - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Debt Consolidation/Refinance 4,985 $239,887,064.52 59.97%
Other 2,583 95,985,848.20 24.00
Home Improvement 1,540 56,526,408.31 14.13
Purchase Money 193 7,600,712.73 1.90
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
PROPERTY TYPE - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Single Family 8,479 $359,724,579.44 89.93%
Condominium 484 21,347,308.86 5.34
Multifamily 338 18,928,145.46 4.73
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
LIEN PRIORITY - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
First 3,309 $219,573,619.35 54.89%
Second 5,831 176,349,055.49 44.09
Third 161 4,077,358.92 1.02
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
S-34
GEOGRAPHICAL DISTRIBUTION - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Alabama 2 $46,909.20 0.01%
Connecticut 333 15,174,431.47 3.79
Delaware 10 574,153.05 0.14
District of Columbia 40 2,032,652.41 0.51
Florida 2,055 88,640,137.00 22.16
Georgia 11 647,666.44 0.16
Maryland 287 11,120,825.83 2.78
Massachusetts 7 200,929.03 0.05
New Jersey 1,640 84,946,419.70 21.24
New York 179 9,265,454.60 2.32
North Carolina 1,558 62,303,442.10 15.58
Pennsylvania 1,515 64,079,184.89 16.02
Rhode Island 3 127,533.67 0.03
South Carolina 362 13,055,823.60 3.26
Tennessee 9 419,913.75 0.10
Virginia 1,290 47,364,557.02 11.84
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
FULLY INDEXED LOAN RATES - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
3.490 to 3.499 1 $57,499.00 0.01%
3.500 to 3.999 510 26,675,256.76 6.67
4.000 to 4.499 3,922 209,428,783.84 52.36
4.500 to 4.999 2,590 94,340,364.97 23.59
5.000 to 5.499 922 37,079,734.29 9.27
5.500 to 5.999 829 22,895,027.30 5.72
6.000 to 6.499 229 5,111,560.82 1.28
6.500 to 6.999 255 3,801,178.72 0.95
7.000 to 7.499 33 425,363.94 0.11
7.500 to 7.999 6 88,302.48 0.02
8.000 to 9.000 4 96,961.64 0.02
- --------------------------------------------- ------------------ ------------------------- ---------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= =====================
o The weighted average fully indexed loan rate of the initial Group I loans
as of the cut-off date is approximately 4.455%.
S-35
FULLY INDEXED GROSS MARGINS - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
-0.760 to -0.501 1 $57,499.00 0.01%
-0.500 to -0.001 1,835 115,432,174.16 28.86
0.000 to 0.499 4,254 182,796,410.86 45.70
0.500 to 0.999 1,300 48,486,189.31 12.12
1.000 to 1.499 1,119 37,349,911.52 9.34
1.500 to 1.999 363 8,723,963.41 2.18
2.000 to 2.499 304 5,356,079.18 1.34
2.500 to 2.999 98 1,371,522.49 0.34
3.000 to 3.499 21 305,277.08 0.08
3.500 to 3.999 3 45,500.15 0.01
4.000 to 4.499 2 67,018.37 0.02
4.500 to 4.750 1 8,488.23 *
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o The weighted average fully indexed gross margin of the initial Group I
loans as of the cut-off date is approximately 0.205% per annum.
* Less than 0.005% but greater than 0.000%.
CREDIT UTILIZATION RATES - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT UTILIZATION RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
2.26 to 10.00 298 $2,623,275.41 0.66%
10.01 to 20.00 792 11,618,439.69 2.90
20.01 to 30.00 842 17,877,960.12 4.47
30.01 to 40.00 936 25,236,314.35 6.31
40.01 to 50.00 828 27,170,157.86 6.79
50.01 to 60.00 766 30,449,788.13 7.61
60.01 to 70.00 777 36,305,721.25 9.08
70.01 to 80.00 826 41,470,313.92 10.37
80.01 to 90.00 956 55,716,215.38 13.93
90.01 to 100.00 2,280 151,531,847.65 37.88
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
o The weighted average credit utilization rate based on the cut-off date
credit limit of the initial Group I loans as of the cut-off date is
approximately 56.76%.
S-36
CREDIT LIMITS - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------- ------------------ ------------------------- ----------------------
7,200.00 to 10,000.00 129 $1,050,458.01 0.26%
10,000.01 to 20,000.00 597 7,505,172.89 1.88
20,000.01 to 30,000.00 1,377 24,500,358.73 6.13
30,000.01 to 40,000.00 868 20,879,386.21 5.22
40,000.01 to 50,000.00 1,072 31,124,114.19 7.78
50,000.01 to 75,000.00 1,301 48,437,726.46 12.11
75,000.01 to 100,000.00 2,293 105,385,043.86 26.35
100,000.01 to 150,000.00 1,028 76,126,495.66 19.03
150,000.01 to 200,000.00 298 34,797,418.03 8.70
200,000.01 to 250,000.00 284 39,493,478.16 9.87
250,000.01 to 300,000.00 42 8,472,812.66 2.12
300,000.01 to 322,500.00 12 2,227,568.90 0.56
- --------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
================================= ================== ========================= ======================
o The average credit limit of the initial Group I loans as of the cut-off
date is approximately $75,770.06.
TEASER EXPIRATION MONTH - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
TEASER EXPIRATION MONTH MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
No Teaser/Teaser Expired 4,752 $251,188,151 62.80%
July 2003 2 50,637.01 0.01
August 2003 3 80,686.76 0.02
September 2003 2 73,077.82 0.02
October 2003 17 519,694.59 0.13
November 2003 378 11,048,797.92 2.76
December 2003 928 30,378,510.14 7.59
January 2004 846 27,632,594.01 6.91
February 2004 1,089 35,237,968.81 8.81
March 2004 1,225 42,262,197.36 10.57
April 2004 39 935,184.89 0.23
May 2004 20 592,533.14 0.15
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
S-37
OCCUPANCY TYPE - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
OCCUPANCY TYPE NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
(AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Primary Residence 8,553 $357,827,462.81 89.46%
Non-Primary Residence 392 22,709,240.82 5.68
Rental Property 356 19,463,330.13 4.87
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
ORIGINATION PERIOD - GROUP I LOANS
PERCENTAGE OF
INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION PERIOD MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
April 2002 to June 2002 1 $27,837.01 0.01%
July 2002 to September 2002 11 297,374.21 0.07
October 2002 to December 2002 2,854 124,076,269.02 31.02
January 2003 to March 2003 6,313 270,364,292.79 67.59
April 2003 to June 2003 122 5,234,260.73 1.31
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 9,301 $400,000,033.76 100.00%
============================================= ================== ========================= ======================
S-38
INITIAL MORTGAGE LOAN CHARACTERISTICS FOR LOAN GROUP II
CURRENT LOAN RATES - GROUP II LOANS
PERCENTAGE OF INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CURRENT LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
3.000 to 4.000 2,706 $234,924,837.04 27.63%
4.001 to 4.250 9,681 513,424,038.62 60.40
4.251 to 4.500 93 3,753,893.44 0.44
4.501 to 4.750 61 1,839,421.68 0.22
4.751 to 5.000 117 13,848,055.42 1.63
5.001 to 6.000 1,850 81,762,299.28 9.62
6.001 to 7.000 33 480,751.20 0.06
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The weighted average current loan rate of the initial Group II loans as of
the cut-off date is approximately 4.273%.
JUNIOR RATIOS - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF JUNIOR RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ---------------------
First Lien 4,092 $348,636,474.82 1.01%
1.59 to 10.00 508 9,358,811.28 1.10
10.01 to 20.00 2,592 85,523,739.95 0.06
20.01 to 30.00 2,481 109,695,858.55 2.90
30.01 to 40.00 1,598 82,450,791.97 9.70
40.01 to 50.00 1,131 62,970,631.68 7.41
50.01 to 60.00 745 49,510,760.87 5.82
60.01 to 70.00 531 39,245,085.15 4.62
70.01 to 80.00 403 30,435,782.72 3.58
80.01 to 90.00 270 20,004,399.81 2.35
90.01 to 100.00 190 12,200,959.88 1.44
- --------------------------------------------- ------------------ ------------------------- ---------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= =====================
o The junior ratio of a mortgage loan is the ratio (expressed as a
percentage) of the credit limit of that mortgage loan to the sum of such
credit limit and the principal balance of any related senior mortgage loan
at origination of that mortgage loan.
o The weighted average junior ratio of the initial Group II loans that are
secured by second or third liens on the mortgaged properties as of the
cut-off date is approximately 40.37%.
S-39
COMBINED LOAN-TO-VALUE RATIOS - GROUP II LOANS
PERCENTAGE OF INITIAL
GROUP II LOANS
RANGE OF COMBINED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
4.00 to 10.00 41 $1,100,318.07 0.13%
10.01 to 20.00 162 5,938,754.77 0.70
20.01 to 30.00 290 13,911,896.26 1.64
30.01 to 40.00 410 26,968,819.41 3.17
40.01 to 50.00 588 37,836,572.43 4.45
50.01 to 60.00 889 58,251,798.69 6.85
60.01 to 70.00 1,264 87,490,563.07 10.29
70.01 to 80.00 1,786 143,693,728.42 16.90
80.01 to 90.00 6,271 331,835,610.06 39.04
90.01 to 100.00 2,840 143,005,235.50 16.82
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The minimum and maximum combined loan-to-value ratios of the initial
mortgage loans as of the cut-off date are approximately 4.00% and 100.00%,
respectively, and the weighted average combined loan-to-value ratio of the
initial Group II loans as of the cut-off date is approximately 77.48%.
PRINCIPAL BALANCES - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
5,000.91 to 10,000.00 1,673 $12,932,937.74 1.52%
10,000.01 to 20,000.00 2,938 43,970,104.78 5.17
20,000.01 to 30,000.00 2,271 56,241,831.08 6.62
30,000.00 to 40,000.00 1,601 55,873,261.28 6.57
40,000.01 to 50,000.00 1,145 51,702,247.08 6.08
50,000.01 to 75,000.00 1,722 105,794,146.48 12.45
75,000.01 to 100,000.00 1,250 110,803,496.98 13.04
100,000.01 to 150,000.00 864 106,651,174.48 12.55
150,000.01 to 200,000.00 399 69,626,819.80 8.19
200,000.01 to 250,000.00 248 56,181,134.50 6.61
250,000.01 to 300,000.00 125 34,281,580.62 4.03
300,000.01 to 400,000.00 149 51,040,250.44 6.00
400,000.01 to 500,000.00 89 40,407,634.38 4.75
500,000.01 to 1,000,000.00 55 36,923,745.65 4.34
1,000,000.01 to 2,000,000.00 11 15,387,073.14 1.81
2,000,000.01 to 2,215,858.25 1 2,215,858.25 0.26
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The average principal balance of the initial Group II loans as of the
cut-off date is approximately $58,457.69.
S-40
MAXIMUM LOAN RATES - GROUP II LOANS
PERCENTAGE OF INITIAL
GROUP I LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CURRENT LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
16.000 2,147 $113,630,181.17 13.37%
18.000 12,394 736,403,115.51 86.63
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
REMAINING DRAW TERM - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
REMAINING DRAW TERM (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
99 to 102 2 $1,047,070.03 0.12%
103 to 108 35 1,785,281.65 0.21
109 to 114 335 24,186,972.99 2.85
115 to 120 334 27,820,124.62 3.27
217 to 222 6 157,881.35 0.02
223 to 228 98 4,446,103.20 0.52
229 to 234 7,245 380,575,135.59 44.77
235 to 239 6,486 410,014,727.25 48.24
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The weighted average remaining draw term of the initial Group II loans as
of the cut-off date is approximately 227 months.
CREDIT SCORES AS OF THE DATE OF ORIGINATION - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT SCORES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Not Available 9 $774,933.85 0.09%
483 to 500 2 169,560.92 0.02
526 to 550 2 178,068.00 0.02
551 to 575 7 585,350.80 0.07
576 to 600 25 2,078,207.01 0.24
601 to 625 208 18,726,981.64 2.20
626 to 650 589 39,974,677.04 4.70
651 to 675 1,284 83,279,547.19 9.80
676 to 700 1,779 108,555,814.99 12.77
701 to 725 2,128 131,006,539.83 15.41
726 to 750 2,478 138,138,132.37 16.25
751 to 775 2,990 166,187,932.26 19.55
776 to 800 2,512 134,350,530.09 15.81
801 to 822 528 26,027,020.69 3.06
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o Of the initial mortgage loans with available credit scores, the weighted
average credit score at origination of those Group II loans as of the
cut-off date is approximately 727.
S-41
DOCUMENTATION TYPE - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
1 YTD Pay Stub or 2 Years Tax Returns 3,866 $461,901,967.48 54.34%
No Income Documentation Required 10,487 370,751,200.27 43.62
1 YTD Pay Stub and last W-2
or 2 Years Tax Returns 188 17,380,128.93 2.04
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
LOAN PURPOSE - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Debt Consolidation/Refinance 7,139 $446,344,677.01 52.51%
Other 4,443 246,097,933.70 28.95
Home Improvement 2,572 128,894,161.12 15.16
Purchase Money 387 28,696,524.85 3.38
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
PROPERTY TYPE - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Single Family 13,364 $781,242,842.06 91.91%
Condominium 628 35,641,174.78 4.19
Multifamily 545 32,909,915.45 3.87
Agricultural Property with a Residence 4 239,364.39 0.03
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
LIEN PRIORITY - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LIEN POSITION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
First 4,092 $348,636,474.82 41.01%
Second 10,147 491,079,477.63 57.77
Third 302 10,317,344.23 1.21
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
S-42
GEOGRAPHICAL DISTRIBUTION - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Alabama 6 $677,372.66 0.08%
Connecticut 693 52,087,846.22 6.13
Delaware 14 1,215,335.80 0.14
District of Columbia 75 4,205,174.19 0.49
Florida 2,778 166,700,531.36 19.61
Georgia 879 62,368,965.22 7.34
Maryland 467 25,704,100.97 3.02
Massachusetts 17 621,418.09 0.07
New Jersey 2,689 175,268,708.45 20.62
New York 423 35,314,401.70 4.15
North Carolina 2,099 111,284,939.38 13.09
Pennsylvania 2,018 102,137,062.82 12.02
Rhode Island 10 231,413.30 0.03
South Carolina 542 29,483,695.39 3.47
Tennessee 3 518,654.99 0.06
Virginia 1,826 82,166,750.72 9.67
West Virginia 2 46,925.42 0.01
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
FULLY INDEXED LOAN RATES - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
3.000 to 3.499 9 $4,659,220.16 0.55%
3.500 to 3.999 675 54,729,479.36 6.44
4.000 to 4.499 6,607 472,462,940.89 55.58
4.500 to 4.999 3,972 173,834,541.88 20.45
5.000 to 5.499 1,563 89,174,487.11 10.49
5.500 to 5.999 1,139 41,098,684.07 4.83
6.000 to 6.499 281 9,170,227.02 1.08
6.500 to 6.999 260 4,324,255.76 0.51
7.000 to 7.499 26 314,862.95 0.04
7.500 to 7.999 4 81,655.09 0.01
8.000 to 8.499 2 81,767.75 0.01
8.500 to 9.000 3 101,174.64 0.01
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The weighted average fully indexed loan rate of the initial Group II loans
as of the cut-off date is approximately 4.424%.
S-43
FULLY INDEXED GROSS MARGINS - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
RANGE OF FULLY INDEXED NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
-1.250 to -1.001 1 $1,120,000.00 0.13%
-1.000 to -0.501 13 4,120,454.56 0.48
-0.500 to -0.001 2,867 239,319,940.28 28.15
0.000 to 0.499 6,913 395,247,355.54 46.50
0.500 to 0.999 2,111 106,335,019.81 12.51
1.000 to 1.499 1,694 77,142,704.46 9.08
1.500 to 1.999 500 18,399,361.61 2.16
2.000 to 2.499 328 6,621,072.30 0.78
2.500 to 2.999 93 1,311,413.60 0.15
3.000 to 3.499 14 187,494.72 0.02
3.500 to 3.999 3 58,128.17 0.01
4.000 to 4.499 2 91,182.99 0.01
4.500 to 4.750 2 79,168.64 0.01
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The weighted average fully indexed gross margin of the initial Group II
loans as of the cut-off date is approximately 0.174% per annum.
CREDIT UTILIZATION RATES - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT UTILIZATION RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- -------------------------
1.70 to 10.00 706 $7,453,438.13 0.88%
10.01 to 20.00 1,552 27,056,848.73 3.18
20.01 to 30.00 1,490 39,239,311.34 4.62
30.01 to 40.00 1,421 46,297,231.37 5.45
40.01 to 50.00 1,208 52,391,929.21 6.16
50.01 to 60.00 1,156 60,781,498.66 7.15
60.01 to 70.00 1,126 70,304,925.68 8.27
70.01 to 80.00 1,171 89,116,729.22 10.48
80.01 to 90.00 1,260 106,832,934.40 12.57
90.01 to 100.00 3,451 350,558,449.94 41.24
- --------------------------------------------- ------------------ ------------------------- -------------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= =========================
o The weighted average credit utilization rate based on the cut-off date
credit limit of the initial Group II loans as of the cut-off date is
approximately 55.94%.
S-44
CREDIT LIMITS - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMITS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
5,500.00 to 10,000.00 165 $1,266,800.63 0.15%
10,000.01 to 20,000.00 660 8,102,228.90 0.95
20,000.01 to 30,000.00 1,543 26,940,462.59 3.17
30,000.01 to 40,000.00 1,134 26,921,419.43 3.17
40,000.01 to 50,000.00 1,437 39,744,133.61 4.68
50,000.01 to 75,000.00 1,909 70,160,166.67 8.25
75,000.01 to 100,000.00 3,794 175,430,946.59 20.64
100,000.01 to 150,000.00 1,660 114,217,717.56 13.44
150,000.01 to 200,000.00 760 75,089,271.26 8.83
200,000.01 to 250,000.00 742 91,103,829.52 10.72
250,000.01 to 300,000.00 159 31,125,473.45 3.66
300,000.01 to 400,000.00 232 54,699,478.56 6.43
400,000.01 to 500,000.00 225 67,894,865.56 7.99
500,000.01 to 1,000,000.00 101 45,491,001.95 5.35
1,000,000.01 to 2,000,000.00 18 19,420,615.22 2.28
2,000,000.01 to 2,500,000.00 2 2,424,885.18 0.29
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
o The average credit limit of the initial Group II loans as of the cut-off
date is approximately $104,495.67.
TEASER EXPIRATION MONTH - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
TEASER EXPIRATION MONTH MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
No Teaser/Teaser Expired 7,969 $581,123,594 68.36%
July 2003 89 3,412,153.31 0.40
August 2003 214 6,194,427.64 0.73
September 2003 342 9,514,691.57 1.12
October 2003 798 26,790,354.47 3.15
November 2003 1,030 41,138,700.59 4.84
December 2003 1,089 50,236,478.32 5.91
January 2004 725 33,968,996.20 4.00
February 2004 855 39,008,069.10 4.59
March 2004 898 39,418,998.27 4.64
April 2004 315 11,805,170.79 1.39
May 2004 217 7,421,662.32 0.87
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
S-45
OCCUPANCY TYPE - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
OCCUPANCY TYPE NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
(AS INDICATED BY BORROWER) MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
Primary Residence 13,299 $749,440,769.17 88.17%
Non-Primary Residence 661 64,861,483.54 7.63
Rental Property 577 35,491,679.58 4.18
Agricultural Property 4 239,364.39 0.03
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
ORIGINATION PERIOD - GROUP II LOANS
PERCENTAGE OF
INITIAL
GROUP II LOANS
NUMBER OF INITIAL CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION PERIOD MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------------------------------------- ------------------ ------------------------- ----------------------
July 2001 to September 2001 2 $55,944.92 0.01%
October 2001 to December 2001 5 1,054,665.35 0.12
January 2002 to March 2002 36 1,831,767.87 0.22
April 2002 to June 2002 61 3,121,481.17 0.37
July 2002 to September 2002 1,424 51,894,653.90 6.11
October 2002 to December 2002 6,187 353,584,233.88 41.60
January 2003 to March 2003 5,757 383,491,604.51 45.11
April 2003 to June 2003 1,069 54,998,945.08 6.47
- --------------------------------------------- ------------------ ------------------------- ----------------------
TOTAL 14,541 $850,033,296.68 100.00%
============================================= ================== ========================= ======================
S-46
TERMS OF THE MORTGAGE LOANS
Interest on each mortgage loan is calculated based on the average daily
balance outstanding during the related billing cycle.
Each mortgage loan has a loan rate that is subject to adjustment on
each adjustment date, as specified in the related credit line agreement, to
equal the sum of:
o the index; and
o the gross margin;
provided, however, that the loan rate on each mortgage loan will in no event be
greater than the maximum loan rate.
The index for each mortgage loan is the "prime rate" established by the
financial institutions surveyed by and as published in the EASTERN EDITION of
THE WALL STREET JOURNAL in publishing its "Money Rates" table (or any
replacement thereof) or, if such rate is not available, a substitute rate
selected in accordance with the related credit line agreement.
In certain instances, the gross margins with respect to the mortgage
loans have been discounted based on specific employee status with the seller or
its subsidiaries at the time of origination of the mortgage loan, with an
adjustment in the event of a negative employment termination of the borrower (an
adjustment would be made on voluntary or involuntary termination, but would not
be made for non-continuation of employment based upon retirement, disability,
severance, etc.).
Each mortgage loan generally has a Draw Period of 20 years unless
restricted by state law. The related mortgagor for each mortgage loan may make a
draw at any time during the Draw Period. Mortgage loans that have a Repayment
Period following the Draw Period are not permitted to incur any advance during
the related Repayment Period.
If a balance is outstanding on a mortgage loan at the end of a Draw
Period, two repayment schedules determine the repayment process for the
outstanding balance on the mortgage loan, including accrued interest and other
fees. Mortgage loans that have an application date or were originated prior to
July 27th, 2001 (in the case of Pennsylvania) or October 26th, 2001 (in the case
of all other states), require a balloon payment of the outstanding balance owed
on the mortgage loan following the termination of the Draw Period. Originations
on or after the above dates provide for a variable repayment schedule (based
upon the outstanding balance and interest rate as more fully described below)
that follows the Draw Period.
Mortgagors are given a choice of two payment options during the Draw
Period. Option A requires a minimum monthly payment equal to the greater of (i)
the finance charge on the outstanding balance plus accrued but unpaid fees or
(ii) $50. Option B requires a minimum monthly payment of the greater of (i) 1.5%
of the outstanding balance or (ii) $50. The outstanding balance is due either as
a balloon payment or through a Repayment Period. Mortgage Loans with a Repayment
Period require the mortgagors to make a minimum monthly payment of the greater
of 2% of the outstanding balance or $50 until the outstanding balance is paid in
full; provided in all states other than New York, that on the specified final
maturity date thereof the minimum payment due will equal the entire outstanding
balance thereof.
The maximum amount of each draw with respect to any mortgage loan is
equal to the excess, if any, of the credit limit of that mortgage loan over the
outstanding principal balance under the related credit line agreement at the
time of such draw. Each mortgage loan may be prepaid in full or in part at any
time and without penalty, but with respect to each mortgage loan, the related
mortgagor will have the right during the related Draw Period to make a draw in
the amount of any prepayment theretofore made
S-47
with respect to that mortgage loan. Each mortgagor generally will have access to
make draws by check, or in some cases by credit card, subject to applicable law.
Generally, the credit line agreement or mortgage related to each mortgage loan
will, subject to applicable law, contain a customary "due-on-sale" clause.
As to each mortgage loan, the mortgagor's right to receive draws during
the Draw Period may be suspended, or the related credit limit may be reduced,
under a number of circumstances, including, but not limited to:
o a material adverse change in the mortgagor's financial
circumstances;
o a decline in the value of the mortgaged property significantly
below its appraised value at origination; or
o a payment default by the mortgagor.
However, generally such suspension or reduction will not affect the payment
terms for previously drawn balances. The servicer will have no obligation under
the servicing agreement to investigate as to whether any such circumstances have
occurred and may have no knowledge of them. Therefore, there can be no assurance
that any mortgagor's ability to receive draws will be suspended or reduced in
the event that the foregoing circumstances occur.
In the event of default under a mortgage loan, the mortgage loan may be
terminated and declared immediately due and payable in full. For this purpose, a
default includes, but is not limited to:
o the mortgagor's failure to make any payment as required;
o any action or inaction by the mortgagor that adversely affects the
mortgaged property or the rights in the mortgaged property; or
o fraud or material misrepresentation by a mortgagor in connection
with the mortgage loan.
None of the mortgage loans are insured by mortgage insurance policies
covering all or a portion of any losses on each loan, subject to certain
limitations.
THE FUNDING ACCOUNT; CONVEYANCE OF ADDITIONAL BALANCES AND SUBSEQUENT MORTGAGE
LOANS
THE FUNDING ACCOUNT
On the closing date, the indenture trustee will establish a Funding
Account for each loan group for the benefit of the holders of the related notes
(the "Group I Funding Account" and the "Group II Funding Account",
respectively). On each payment date during the related Revolving Period, the
servicer will deposit Principal Collections (to the extent not used to purchase
additional balances, subsequent mortgage loans or to pay amounts in respect of
any related Additional Balance Increase Amount) and Excess Spread (to the extent
available to cover liquidation loss amounts, and, on and after the payment date
occurring in January 2004, to increase the overcollateralization amount to the
overcollateralization target amount) into the applicable Funding Account, and
will apply those amounts to purchase additional balances arising under mortgage
loans in the applicable loan group already included in the trust fund and to
purchase subsequent mortgage loans from the depositor for the related loan
group, to the extent available.
On the payment date immediately succeeding the date on which the
related Revolving Period ends, in the event that any amounts remain on deposit
in the applicable Funding Account, after giving effect to the purchase by the
issuer of all additional balances and/or subsequent mortgage loans, including
any purchased on the date on which such Revolving Period ends, and payments to
the certificateholders in respect of any related Additional Balance Increase
Amount, those amounts will be transferred to the Note
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Payment Account for distribution to the holders of the related notes. Payments
on the Class A-II-1 notes and the Class A-II-2 notes will be made on a pro rata
basis.
PURCHASE OF ADDITIONAL BALANCES
During the Group I Revolving Period and the Managed Amortization Period
for the Class A-I-1 notes, the servicer will first apply amounts in the Group I
Funding Account, if any, to purchase additional balances created under the
mortgage loans in loan group I and during the Group II Revolving Period and the
Managed Amortization Period for the Class A-II notes, the servicer will first
apply amounts in the Group II Funding Account, if any, to purchase additional
balances created under the mortgage loans in loan group II. If amounts in the
applicable Funding Account are insufficient, the servicer will next apply
amounts from the related Principal Collections in the Custodial Account and, if
they are insufficient, on or after the payment date occurring in January 2004,
related available Excess Spread in the Custodial Account up to the amount that
would be available to be deposited in the related Funding Account on the next
payment date, to purchase additional balances created under the mortgage loans
in such loan group. However, Excess Spread on deposit in the Custodial Account
will not be permitted to be used to purchase additional balances if any
unreimbursed draws under the Policy are owed to the enhancer.
During the Rapid Amortization Period, no additional balances will be
purchased by the trust. With respect to collections in respect of additional
balances created under the mortgage loans in each loan group during the related
Rapid Amortization Period, the related Excluded Draw will be the property of the
seller and not the depositor or issuer and the related Excluded Amount will not
constitute a part of Principal Collections or Interest Collections.
All additional balances on the mortgage loans in each loan group that
arise prior to the Rapid Amortization Period will be transferred from the seller
to the depositor and from the depositor to the issuer.
SUBSEQUENT MORTGAGE LOANS
The purchase agreement and the trust agreement permit the depositor and
the issuer, respectively, to acquire subsequent mortgage loans for either loan
group during the related Revolving Period. Accordingly, the statistical
characteristics of the entire pool of mortgage loans upon the acquisition of the
subsequent mortgage loans may vary somewhat from the statistical characteristics
of the initial mortgage loans as of the cut-off date as presented in this
prospectus supplement.
Each subsequent mortgage loan will have been underwritten substantially
in accordance with the criteria set forth in this prospectus supplement under
"Description of the Mortgage Loans--Underwriting Standards." Subsequent mortgage
loans will be transferred to the issuer pursuant to subsequent transfer
agreements. In connection with the purchase of subsequent mortgage loans, on
each date subsequent mortgage loans are conveyed to the trust fund, or
subsequent transfer dates, the issuer will be required to pay to the depositor
from amounts on deposit in the applicable Funding Account a cash purchase price
of 100% of the principal balance thereof. In each instance in which subsequent
mortgage loans are transferred to the trust fund pursuant to a subsequent
transfer agreement, the issuer will designate a cut-off date with respect to the
subsequent mortgage loans acquired on that date. The amount paid from the
related Funding Account on each subsequent transfer date will not include
accrued interest on the subsequent mortgage loans. Following each subsequent
transfer date, the aggregate principal balance of the mortgage loans in the
applicable loan group will increase by an amount equal to the aggregate
principal balance of the subsequent mortgage loans so acquired and the amount in
the related Funding Account will decrease accordingly.
S-49
Any conveyance of subsequent mortgage loans in loan group I on a
subsequent transfer date is subject to certain conditions including, but not
limited to:
(1) each subsequent mortgage loan must satisfy the representations and
warranties specified in the purchase agreement and in the related
subsequent transfer agreement;
(2) the depositor will select subsequent mortgage loans in a manner
that it reasonably believes is not adverse to the interests of the
holders of the notes or the enhancer; and
(3) as of each subsequent cut-off date, each subsequent mortgage loan
will satisfy the following criteria:
o the original stated term to maturity of the subsequent
mortgage loan will not exceed 480 months;
o the subsequent mortgage loan must have an outstanding
principal balance of at least $1,000 and no more than
$1,000,000 as of the subsequent cut-off date;
o the subsequent mortgage loan will be underwritten
substantially in accordance with the criteria set forth under
"Description of the Mortgage Loans--Underwriting Standards"
in this prospectus supplement;
o the subsequent mortgage loan shall not provide for negative
amortization;
o following the purchase of the subsequent mortgage loan by the
issuer, the mortgage loans must have a weighted average loan
margin, a weighted average remaining term to maturity and a
weighted average CLTV Ratio at origination, as of each
respective subsequent cut-off date, which would not vary
materially from the initial mortgage loans; and
o if the subsequent mortgage loan is (a) a first lien mortgage
loan, it shall have a credit limit that is less than or equal
to $322,700 or (b) a junior lien mortgage loan (i) the sum of
the credit limit and the principal balances of any related
senior loans will be less than or equal to $322,700 and (ii)
the credit limit will be less than or equal to $161,350.
Any conveyance of subsequent mortgage loans in loan group II on a
subsequent transfer date is subject to certain conditions including, but not
limited to:
(1) each subsequent mortgage loan must satisfy the representations and
warranties specified in the purchase agreement and in the related
subsequent transfer agreement;
(2) the depositor will select subsequent mortgage loans in a manner
that it reasonably believes is not adverse to the interests of the
holders of the notes or the enhancer; and
(3) as of each subsequent cut-off date, each subsequent mortgage loan
will satisfy the following criteria:
o the original stated term to maturity of the subsequent
mortgage loan will not exceed 480 months;
o the subsequent mortgage loan must have an outstanding
principal balance of at least $1,000 and no more than
$1,000,000 as of the subsequent cut-off date;
o the subsequent mortgage loan will be underwritten
substantially in accordance with the criteria set forth under
"Description of the Mortgage Loans--Underwriting Standards"
in this prospectus supplement;
o the subsequent mortgage loan shall not provide for negative
amortization; and
S-50
o following the purchase of the subsequent mortgage loan by the
issuer, the mortgage loans must have a weighted average loan
margin, a weighted average remaining term to maturity and a
weighted average CLTV Ratio at origination, as of each
respective subsequent cut-off date, which would not vary
materially from the initial mortgage loans.
In addition, the indenture trustee will not agree to any transfer of
subsequent mortgage loans in any loan group without the approval of the
enhancer, which approval shall not be unreasonably withheld; provided, however
that the enhancer will provide notice of approval or disapproval within 5
business days or the subsequent mortgage loans will be deemed approved by the
enhancer. Subsequent mortgage loans with characteristics materially varying from
those set forth above may be purchased by the issuer and included in the trust
fund with the approval of the enhancer; provided, however, that the addition of
the subsequent mortgage loans will not materially affect the aggregate
characteristics of the entire pool of mortgage loans.
UNDERWRITING STANDARDS
Applications for home equity lines of credit are received by the seller
primarily through four channels:
o Wachovia Bank Financial Center locations;
o Wachovia Direct Access (telephone and internet access);
o direct mail; and
o a concurrent cross-sell program with Wachovia Mortgage
Corporation, an affiliate of Wachovia Bank.
All of the mortgage loans will be originated by the seller. All of the
mortgage loans were underwritten generally in accordance with the seller's
underwriting standards. The following is a brief description of the underwriting
standards and procedures applicable to the mortgage loans.
Generally, all consumer credit applications are processed on Wachovia's
Application Handling System, referred to in this prospectus supplement as AH,
which is a proprietary, on-line application processing and underwriting tool.
Home equity line of credit applications originated as part of the Wachovia
Mortgage Corporation concurrent cross-sell program are not entered into the AH
processing system, but are underwritten to substantially the same guidelines. At
the point-of-sale, the prospective borrower's pertinent information is entered
into AH. When all appropriate/required application information has been
captured, AH "background" processing will electronically obtain a credit report,
including, but not limited to a bureau score, calculate a custom credit score
and evaluate the application against the seller's current approved underwriting
standards. Some examples of the seller's current approved underwriting standards
are noted below:
o Borrowers must be a U. S. citizen or permanent resident alien;
o Borrowers are prohibited from having a bankruptcy or foreclosure
within the past 48 months;
o Judgments, collections, previous charge-offs and tax liens
generally must be paid if: greater than $2,500 for a single
judgment, greater than $7,500 for multiple judgments, and
collections/repossessions greater than $2,500, and all tax liens
must be paid;
o Combined loan-to-value ratio may not exceed 100%;
S-51
o Maximum debt-to-income ratio generally may not exceed 50% as
calculated against the borrower's gross income; and
o Required stipulations, when applicable, including but not limited
to, income verification, valuation of collateral, property and
flood insurance requirements, etc.
The seller utilizes a zip code reference table to select the consumer
reporting agency that will provide the required credit report.
As indicated above, the borrower's credit application is scored to
determine eligibility. Two types of credit scores are employed in evaluating
each credit application.
o Bureau Score: The credit bureau score used is the traditional Fair
Isaac Credit Score (FICO) model in use at the three major consumer
reporting agencies.
o Custom Score: The seller uses six different Fair Isaac developed
custom scorecards in the home equity line of credit application
decision making process. The scorecards are segmented into
geographic regions and secondarily consider whether a banking
relationship exists. There are three geographic regions: (1)
Florida, (2) North Carolina, South Carolina and Georgia and (3)
Virginia, Maryland, Washington DC, New York, New Jersey,
Connecticut, Pennsylvania and Delaware. Within each geographic
region there is a further segmentation based upon banking
relationship. Those applicants with two or more banking
relationships with the seller (not including the loan application
under review) are considered bank customers and are scored
differently than those applicants with less than two
relationships. Extensive validation to ensure that each scorecard
is demonstrably and statistically sound has been and continues to
be performed.
The combination of bureau score and custom score is used in a matrix
fashion to determine the applicable credit grade. Any credit grade that has been
designated with an "A" has passed the seller's credit scoring standards. An
application with a credit grade of "A" may still be declined if other
underwriting standards are not met. Possible reasons for declining an
application include loan-to-value ratio, debt-to-income ratio, presence of a
bankruptcy or foreclosure within 48 months, or unacceptable collateral.
Applications will also be declined if the loan amount is greater than the
maximum or less than the minimum allowed. Any credit grade that has been
designated with a "D" has failed the seller's credit-scoring standard and will
receive a system recommended decline.
The credit grade is a measure of credit risk for that credit
application. It is used to determine loan parameters, including, but not limited
to, maximum loan-to-value and debt-to-income ratios. In addition, the credit
grade determines the risk-based pricing and the stipulations required to
originate the home equity line of credit. All system approved credit
applications are electronically forwarded to the seller's credit operational
support sites for processing and document preparation. The support sites gather
all required verifications including, but not limited to income verification,
property valuation, flood certification and title search.
Income documentation requirements are established according to credit
grade and loan amount.
S-52
- ----------------- ---------------------------------------------------------------------------------------------------------
GRADE LOAN AMOUNT INCOME DOCUMENTATION REQUIREMENT
- ----------------- ---------------------------------------------------------------------------------------------------------
A1,A3 Less than or equal to No income documentation required. (Includes self-employed
$100,000 applicants if self-employed 3 years or greater.)
---------------------------------------------------------------------------------------------------------
Greater than $100,000 or 1 pay stub supporting year-to-date income.
Self-Employed less than 3
years Self-Employed applicants: 2 year's tax returns.
- ----------------- ---------------------------------------------------------------------------------------------------------
A4,A5 Less than or equal to No income documentation required. (Includes self-employed
$25,000 applicants if self-employed 3 years or greater.)
---------------------------------------------------------------------------------------------------------
Greater than $25,000 or 1 pay stub supporting year-to-date income.
Self-Employed less than 3
years Self-Employed applicants: 2 year's tax returns.
- ----------------- ---------------------------------------------------------------------------------------------------------
D6, D7, OR D8 All loan amounts 1 pay stub supporting year-to-date income.
(IF OVERRIDDEN The most recent W-2 form.
TO AN APPROVAL)
Self-Employed applicants: 2 year's tax returns.
- ----------------- ---------------------------------------------------------------------------------------------------------
Property valuation methods are determined based on the credit limit and
loan purpose as noted below:
CREDIT LIMIT ACCEPTABLE VALUATION METHODOLOGY
- ------------------------------------------- ----------------------------------
Less than or equal to $150,000............ Any of the following:
o Full Fannie Mae appraisal
(including third party
appraisals less than
twelve months old)
o Tax assessment valuation
o Electronic valuation
o Desk-top valuation
o Drive-by valuation
$150,001 to $250,000...................... All of the above except tax value
Greater than $250,000 and
all purchase money........................ Full Fannie Mae appraisal
Once all stipulations have been fulfilled, the operational support site
updates AH with the verified information and reprocesses the application through
AH background to ensure the decision is still a recommended approval. A loan
processor and/or underwriter reviews the application and all supporting
documentation prior to final approval and document preparation.
S-53
Exceptions to the applicable underwriting standards may occur on a
case-by-case basis. Such underwriting standards exceptions are tracked and
approved only by authorized employees. The seller employs a tiered override
authority process as a means of limiting and controlling exceptions to
underwriting standards and pricing requirements. These exception override levels
are embedded within the AH system. This tiering directs credit applications that
do not meet any of the above standards to employees with the appropriate level
of exception authority. Exceptions have been divided into four tiers. The level
of risk present in the exception will determine the appropriate exception
override authority needed for approval. As the risk increases, the required
exception override level increases while the number of employees with that
authority decreases. The highest level is limited to a small, controlled group.
THE SELLER AND SERVICER
GENERAL
Wachovia Bank is the originator and seller of all of the mortgage loans
and will be the servicer of the mortgage loans. Wachovia Bank is a direct
wholly-owned subsidiary of Wachovia Corporation, a North Carolina corporation
and a multi-bank holding company registered under the Bank Holding Company Act.
Wachovia Bank is engaged in general commercial banking business, offering a full
range of financial services to corporations and individuals. Wachovia Bank's
headquarters and its executive offices are located at 301 South College Street,
Charlotte, North Carolina 28288.
The notes do not represent an interest in or an obligation of the
seller. The seller's only obligations with respect to the notes will be pursuant
to certain limited representations and warranties made by the seller or as
otherwise provided in this prospectus supplement.
In its capacity as servicer, Wachovia Bank will be responsible for
servicing the mortgage loans in accordance with the terms of the servicing
agreement. The records and documents relating to the mortgage loans shall be
retained and maintained in trust by the servicer, except as otherwise provided
in the servicing agreement.
Billing statements for mortgage loans are mailed monthly by the
servicer. The statement details the monthly activity on the related mortgage
loan and specifies the minimum payment due to the servicer and the available
credit line. Notice of changes in the applicable loan rate are provided by the
servicer to the mortgagor with those statements. All payments are due by the
applicable due date.
For information regarding collection and other servicing procedures,
including foreclosure procedures, see "The Servicing Agreement--Realization Upon
Defaulted Mortgage Loans" in this prospectus supplement. Servicing and
charge-off policies and collection practices may change over time in accordance
with the servicer's business judgment, changes in the servicer's portfolio of
real estate secured revolving credit line loans that it services for its
clients, and applicable laws and regulations, and other considerations.
DELINQUENCY AND LOSS EXPERIENCE OF THE SERVICER'S PORTFOLIO
The following tables summarize the delinquency and loss experience for
all home equity lines of credit loans originated by and serviced by Wachovia
Bank. The data presented in the following tables is for illustrative purposes
only, and there is no assurance that the delinquency and loss experience of the
mortgage loans in the mortgage pool will be similar to that set forth below.
S-54
HOME EQUITY LINE OF CREDIT LOANS
PORTFOLIO DELINQUENCY EXPERIENCE
================================================================================
AT MAY 31, 2003 AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ -- ------- ------ ------- ------
Number of Loans 653,328 629,306 533,713
Total Portfolio...... $19,367,836,696 100.00% $17,514,190,567 100.00% $12,253,266,623 100.00%
Period of
Delinquency:
30-59 Days........ $31,321,610 0.16% $38,021,206 0.22% $42,579,895 0.35%
60-89 Days........ $12,627,057 0.07% $15,137,646 0.09% $14,145,903 0.12%
90+ Days......... $16,624,994 0.09% $18,461,435 0.11% $18,344,651 0.15%
Total Loans....... $60,573,661 0.31% $71,620,287 0.41% $75,070,448 0.61%
Foreclosure.......... $31,522,539 0.16% $27,569,164 0.16% $21,075,357 0.17%
Foreclosed (REO
Property)............ $9,793,032 0.05% $7,475,177 0.04% $3,767,155 0.03%
Total Loans in
Foreclosure.......... $41,315,571 0.21% $35,044,341 0.20% $24,842,512 0.20%
Total Delinquent
Loans................ $101,889,232 0.53% $106,664,628 0.61% $99,912,961 0.82%
====================== ================== =========== ================= ============= =============== ===============
PORTFOLIO LOSS AND FORECLOSURE EXPERIENCE
=====================================================================================================================
AT MAY 31, 2003 AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------
Number of Loans 653,328 629,306 533,713
Total Portfolio...... $19,367,836,696 100.00% $17,514,190,567 100.00% $12,253,266,623 100.00%
Total Loans in
Foreclosure.......... $41,315,571 0.20% $35,044,341 0.20% $24,842,512 0.20%
Net Chargeoffs for
Period............... $10,027,000 0.11% $18,900,000 0.11% $13,511,160 0.11%
====================== ================== =========== ================= ============= ================ ==============
o Performing loans in bankruptcy are not included in delinquency statistics.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee for each mortgage loan is payable out of the interest
payments on that mortgage loan. The servicing fee rate for each mortgage loan is
0.50% per annum. The compensation to the servicer consists of:
o the servicing fee payable to the servicer in respect of its
servicing activities; and
o other related compensation.
S-55
The servicer, or, if specified in the servicing agreement, the
indenture trustee, on behalf of the trust fund and from funds available in the
trust fund, will pay or cause to be paid certain ongoing expenses associated
with the trust fund and incurred by it in connection with its responsibilities
under the servicing agreement, including, without limitation, payment of
expenses incurred in enforcing the obligations of the depositor or seller. If
the servicer is not the same person as, or an affiliate of, the depositor or the
seller, the servicer will be entitled to reimbursement of expenses incurred in
enforcing the obligations of the depositor or the seller under certain limited
circumstances. In addition, the servicer will be entitled to reimbursements for
certain expenses incurred by it in connection with liquidated mortgage loans and
in connection with the restoration of mortgaged properties, that right of
reimbursement being prior to the rights of noteholders to receive any related
liquidation proceeds, including insurance proceeds.
THE ISSUER
The Wachovia Asset Securitization, Inc. 2003-HE2 Trust is a statutory
trust established under the laws of the State of Delaware, and will be created
and governed by the trust agreement, for the purposes described in this
prospectus supplement. The trust agreement will constitute the "governing
instrument" of the issuer under the laws of the State of Delaware relating to
statutory trusts. The issuer will not engage in any activity other than:
o acquiring and holding the mortgage loans and the other assets
comprising the trust fund and proceeds therefrom;
o issuing the notes and the certificates;
o making payments on the notes and the certificates; and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The issuer's principal offices are at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001, in care of Wilmington Trust
Company, as owner trustee.
THE OWNER TRUSTEE
Wilmington Trust Company will be the owner trustee under the trust
agreement. The owner trustee is a Delaware banking corporation, and its
principal offices are located in Wilmington, Delaware.
Neither the owner trustee nor any director, officer or employee of the
owner trustee will be under any liability to the issuer or the securityholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the trust agreement, or for errors in judgment; provided, that
none of the owner trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed upon them by
reason of their willful malfeasance, bad faith or negligence in the performance
of their duties, or by reason of their reckless disregard of their obligations
and duties under the trust agreement. All persons into which the owner trustee
may be merged or with which it may be consolidated, or any entity resulting from
a merger or consolidation, will be the successor owner trustee under the trust
agreement.
The commercial bank or trust company serving as owner trustee may have
normal banking relationships with the depositor, the seller and/or their
respective affiliates.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor owner trustee as set forth in
the trust agreement and the indenture. The indenture trustee may also remove the
owner trustee and shall do so upon the direction of the enhancer, so long as
S-56
the enhancer is not then in default under the Policy, and upon the direction of
a majority of the noteholders, if the enhancer is in default under the Policy,
if the owner trustee ceases to be eligible to continue as owner trustee under
the trust agreement or if the owner trustee becomes insolvent. Upon becoming
aware of such circumstances, the indenture trustee will be obligated to appoint
a successor owner trustee at the direction of the enhancer. Any resignation or
removal of the owner trustee and appointment of a successor owner trustee will
not become effective until acceptance of the appointment by the successor owner
trustee.
THE INDENTURE TRUSTEE
U.S. Bank National Association, will act as indenture trustee for the
notes under the indenture. The depositor, the seller and the servicer may
maintain other banking relationships in the ordinary course of business with the
indenture trustee and its affiliates. The principal offices of the indenture
trustee are located at 180 E. 5th Street, St. Paul, Minnesota 55101.
Under the indenture, the issuer, from cashflows in the priorities
described in this prospectus supplement, shall reimburse the indenture trustee
for all Trustee's Additional Expenses. The issuer is not required, however, to
reimburse any expense or indemnify against any loss, liability or expense
incurred by the indenture trustee through the indenture trustee's own willful
misconduct, negligence or bad faith.
THE PAYING AGENT
Wachovia Bank will act as initial paying agent for the notes under the
indenture. The paying agent is affiliated with the depositor, the seller and the
servicer. The principal offices of the paying agent are located at 401 South
Tryon Street - NC1179, Charlotte, North Carolina 28288.
Under the indenture, the issuer, from cashflows in the priorities
described in this prospectus supplement, shall reimburse the paying agent for
the paying agent's extraordinary expenses. The issuer is not required, however,
to reimburse any expense or indemnify against any loss, liability or expense
incurred by the paying agent through the paying agent's own willful misconduct,
negligence or bad faith.
THE ENHANCER
The following information has been supplied by the enhancer for
inclusion in this prospectus supplement. Accordingly, the issuer, the depositor,
the seller, the servicer, the paying agent and the indenture trustee do not make
any representation as to the accuracy and completeness of this information.
Neither the enhancer nor any of its affiliates accepts any responsibility for
the accuracy or completeness of this prospectus supplement or any information or
disclosure contained in this prospectus supplement, or omitted from this
prospectus supplement, other than with respect to the accuracy of the
information regarding the Policy and the enhancer set forth under the headings
"Description of the Policy" and "The Enhancer" in this prospectus supplement.
Additionally, the enhancer makes no representations regarding the notes or the
advisability of investing in the notes.
THE ENHANCER
Financial Guaranty Insurance Company, a New York stock insurance
corporation, is a monoline financial guaranty insurance company which insures
bonds issued by municipal governmental subdivisions and agencies thereof, as
well as a variety of non-municipal structured debt obligations and pass-through
securities. The enhancer is authorized to write insurance in all 50 states, the
District of Columbia and the Commonwealth of Puerto Rico, and to carry on
general insurance business in the United Kingdom.
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The enhancer is a wholly-owned subsidiary of FGIC Corporation, a
Delaware holding company. FGIC Corporation is a subsidiary of General Electric
Company ("GE"). Neither FGIC Corporation nor GE is obligated to pay the debts of
the enhancer or any claims against the Policy.
As of March 31, 2003, December 31, 2002 and December 31, 2001, the
enhancer had written directly or assumed through reinsurance, guaranties of
approximately $428.4 billion, $416.7 and $367.2 billion par value of securities,
respectively (of which approximately 83 percent, 84 percent and 88 percent,
respectively constituted guaranties of municipal bonds), for which it had
collected gross premiums of approximately $2.90 billion, $2.86 billion and $2.62
billion, respectively. As of March 31, 2003, the enhancer had reinsured
approximately 16.7 percent of the risks it had written, 35.0 percent through
quota share reinsurance, 12.3 percent through excess of loss reinsurance, and
52.7 percent through facultative arrangements.
CAPITALIZATION
The following table sets forth the capitalization of the enhancer as of
December 31, 2001, December 31, 2002 and March 31, 2003, respectively, on the
basis of accounting principles generally accepted in the United States of
America. No material adverse change in the capitalization of the enhancer has
occurred since March 31, 2003.
(Dollars in Millions)
DECEMBER 31, 2001 DECEMBER 31, 2002 MARCH 31, 2003
----------------- ----------------- --------------
UNAUDITED
--------------
Unearned Premiums............................ $ 613 $ 684 $693
Other Liabilities............................ 238 255 357
Stockholder's Equity
Common Stock.............................. 15 15 15
Additional Paid-in Capital................ 384 384 384
Accumulated Other Comprehensive
Income(Loss)........................... (15) 49 18
Retained Earnings......................... 1,623 1,741 1,805
----- ----- -----
Total Stockholder's Equity................... 2,007 2,189 2,222
----- ----- -----
Total Liabilities and Stockholder's Equity... $2,858 $3,128 $3,272
====== ====== ======
The financial statements of the enhancer as of December 31, 2002 and
2001 and for each of the years in the three-year period ended December 31, 2002
and the unaudited financial statements of the enhancer as of March 31, 2003 and
for the three month periods ended March 31, 2003 and 2002, which are included in
a Form 8-K filed in connection with the Registration Statement of which this
prospectus supplement is a part, are hereby incorporated by reference in this
prospectus supplement.
The claims paying ability of the enhancer is rated AAA by Standard &
Poor's, a Division of The McGraw-Hill Companies, Inc., Aaa by Moody's Investors
Service, and AAA by Fitch Ratings. Each rating of the enhancer should be
evaluated independently. The ratings reflect the respective rating agency's
current assessment of the insurance financial strength of the enhancer; any
further explanation of any rating may be obtained only from the applicable
rating agency. These ratings are not recommendations to buy, sell or hold the
notes, and are subject to revisions or withdrawal at any time by the rating
agencies. The enhancer does not guaranty the market price of the notes nor does
it guaranty that the ratings on the notes will not be revised or withdrawn.
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REGULATORY COMPLIANCE
The enhancer and its holding company, FGIC Corporation, are subject to
regulation by the State of New York Insurance Department and by each other
jurisdiction in which the enhancer is licensed to write insurance. These
regulations vary from jurisdiction to jurisdiction, but generally require
insurance holding companies and their insurance subsidiaries to register and
file certain reports, including information concerning their capital structure,
ownership and financial condition, and require prior approval by the insurance
department of their state of domicile of changes in control, dividends and other
inter-corporate transfers of assets and of transactions between insurance
companies, their parents and affiliates. The enhancer is required to file
quarterly and annual statutory financial statements and is subject to statutory
restrictions concerning the types and quality of investments, the use of policy
forms, premium rates and the size of risk that it may insure, subject to
reinsurance. Additionally, the enhancer is subject to triennial audits by the
State of New York Insurance Department.
Copies of the enhancer's quarterly and annual statutory statements
filed by the enhancer with the State of New York Insurance Department are
available upon request to Financial Guaranty Insurance Company, 125 Park Avenue,
New York, NY 10017, Attention: Corporate Communications Department. The
enhancer's telephone number is (212) 312-3000.
THE YIELD MAINTENANCE AGREEMENT PROVIDER
The information contained in this section relates to and has been
obtained from Wachovia Bank. It is furnished solely to provide limited
information regarding Wachovia Bank as the provider of the Yield Maintenance
Agreements and does not purport to be comprehensive. Information regarding
Wachovia Bank is qualified in its entirety by the detailed information appearing
in the documents and financial statements referenced below.
Wachovia Bank will be the provider of the Yield Maintenance Agreements.
Wachovia Bank is a subsidiary of Wachovia Corporation, the fifth largest bank
holding company in the United States, based on approximately $348 billion in
total assets as of March 31, 2003.
As of March 31, 2003, Wachovia Bank had total assets of approximately
$324 billion, total net loans of approximately $170 billion, total deposits of
approximately $202 billion and stockholder's equity of approximately $31
billion.
On September 1, 2001, the former Wachovia Corporation merged into First
Union Corporation pursuant to the terms and conditions set forth in an Agreement
and Plan of Merger dated April 15, 2001. As a result, First Union Corporation
(as the surviving corporation) acquired control of the bank and non-bank
subsidiaries of the former Wachovia Corporation. Upon completion of the merger,
First Union Corporation was renamed Wachovia Corporation. On April 1, 2002, the
former Wachovia Bank, N.A. merged into First Union National Bank and the
surviving entity was renamed Wachovia Bank, National Association.
Wachovia Bank submits Consolidated Reports of Condition and Income for a
Bank With Domestic and Foreign Offices, or a call report, to the Federal Deposit
Insurance Corporation, or FDIC, on a quarterly basis. The publicly available
portions of any call report with respect to Wachovia Bank are on file with the
FDIC, and copies of the available portions of any call report may be obtained
from the FDIC, Disclosure Group, Room F518, 550 17th Street, N.W., Washington,
D.C. 20429, at prescribed rates.
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THE AUCTION AGENT
Wachovia Securities, LLC, a Delaware limited liability company, will
act as auction agent with respect to the Class A-II-2 notes pursuant to the
auction agent agreement among the indenture trustee, the auction agent and the
holder of the certificates. See Annex I and Annex II for a description of the
auction procedures and the settlement procedures with respect to the Class
A-II-2 notes.
On or about July 1, 2003, Wachovia Securities, LLC will transfer its
corporate and investment banking division (including all assets and liabilities
related to the business of the division) to a new wholly-owned registered
broker-dealer subsidiary of Wachovia Corporation, Wachovia Capital Markets, LLC.
Wachovia Capital Markets, LLC, will be a member of the NASD, NYSE, and SIPC.
After that transfer, Wachovia Capital Markets, LLC will act as Auction Agent
under the Auction Agent Agreement.
DESCRIPTION OF THE SECURITIES
GENERAL
The notes will be issued pursuant to the indenture. The certificates
will be issued pursuant to the trust agreement.
The following summaries describe certain provisions of the securities,
the indenture and the trust agreement. These summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreements. Only the notes are being offered by
this prospectus supplement.
The notes will be secured by the trust fund, which will be pledged by
the issuer to the indenture trustee pursuant to the indenture. The trust fund
will consist of, without limitation:
o the mortgage loans, including all additional balances and any
subsequent mortgage loans;
o all amounts on deposit in the Custodial Account, the Note Payment
Account, the Distribution Account and the Funding Account;
o the Yield Maintenance Agreements;
o the Policy; and
o all proceeds of the foregoing.
Payments on the Class A-I-1 notes will be based primarily on amounts
collected or received in respect of the group I loans. Payments on the Class
A-II notes will be based primarily on amounts collected or received in respect
of the group II loans. Until the beginning of the related Managed Amortization
Period, subsequent mortgage loans may be added to the related loan group. In
addition, until the beginning of the related Rapid Amortization Period,
additional balances are expected to be added to the related loan group. Apart
from the use of any funds in the Custodial Account and the Funding Account and
Excess Spread, as described in this prospectus supplement, to acquire additional
balances and/or subsequent mortgage loans, none of the issuer, the paying agent
or the indenture trustee are obligated to fund any additional balances or
subsequent mortgage loans.
BOOK-ENTRY NOTES
The notes will initially be issued as book-entry notes. Note Owners may
elect to hold their notes through The Depository Trust Company, or DTC, in the
United States, or Clearstream, Luxembourg or the Euroclear System in Europe if
they are Participants in those systems, or indirectly through
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organizations that are Participants in those systems. The book-entry notes will
be issued in one or more securities that equal the Note Balance, and will
initially be registered in the name of Cede & Co., the nominee of DTC.
Clearstream, Luxembourg and the Euroclear System will hold omnibus positions on
behalf of their Participants through customers' securities accounts in the names
of Clearstream, Luxembourg and the Euroclear System on the books of their
respective depositaries, which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Investors
may hold beneficial interests in the book-entry notes in minimum denominations
of $25,000 and in integral multiples of $1,000 in excess thereof. Except as
described below, no beneficial owner will be entitled to receive a definitive
note. Unless and until definitive notes are issued, it is anticipated that the
only "Holder" of the notes will be Cede & Co., as nominee of DTC. Note Owners
will not be "Holders" or "Noteholders" as those terms are used in the indenture.
A beneficial owner's ownership of a book-entry note will be recorded on
the records of the Securities Intermediary that maintains that beneficial
owner's account for such purpose. In turn, the Securities Intermediary's
ownership of the book-entry notes will be recorded on the records of DTC, or of
a Participating firm that acts as agent for the Securities Intermediary, the
interest of which will in turn be recorded on the records of DTC, if the Note
Owner's Securities Intermediary is not a DTC Participant, and on the records of
Clearstream, Luxembourg or the Euroclear System, as appropriate.
Note Owners will receive all disbursements of principal of and interest
on the notes from the paying agent through DTC and DTC Participants. Except
under the circumstances described below, while the notes are outstanding, under
the DTC Rules, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the notes and is required to receive and
transmit payments of principal of and interest on the notes. Participants and
indirect Participants with which Note Owners have accounts with respect to notes
are similarly required to make book-entry transfers and receive and transmit
payments on behalf of their respective Note Owners. Accordingly, although Note
Owners will not possess physical certificates, the DTC Rules provide a mechanism
by which Note Owners will receive payments and will be able to transfer their
interests.
Note Owners will not receive or be entitled to receive definitive notes
representing their respective interests in the notes, except under the limited
circumstances described below. Unless and until definitive notes are issued,
Note Owners that are not Participants may transfer ownership of their notes only
through Participants and indirect Participants by instructing the Participants
and indirect Participants to transfer the notes, by book-entry transfer, through
DTC for the account of the purchasers of the notes, which account is maintained
with the related Participants. Under the DTC Rules and in accordance with DTC's
normal procedures, transfers of ownership of the notes will be executed through
DTC, and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Note Owners.
Under a book-entry format, Note Owners of the book-entry notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the paying agent to Cede & Co. Payments with respect to notes held
through Clearstream, Luxembourg or the Euroclear System will be credited to the
cash accounts of Clearstream, Luxembourg Participants or Euroclear System
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the related Depositary. Such payments will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of financial intermediaries, the
ability of a Note Owner to pledge book-entry notes to persons or entities that
do not participate in the Depositary system, or otherwise take actions in
respect of such book-entry notes, may be limited due to the lack of physical
certificates for such book-entry notes. In addition, the issuance of the notes
in book-entry form may reduce the liquidity thereof in the secondary market,
since certain potential investors may be unwilling to purchase securities for
which they cannot obtain physical certificates.
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DTC has advised the indenture trustee that, unless and until definitive
notes are issued, DTC will take any action permitted to be taken by the holders
of the book-entry notes under the indenture only at the direction of one or more
financial intermediaries to the DTC accounts of which the book-entry notes are
credited, to the extent that such actions are taken on behalf of financial
intermediaries the holdings of which include such book-entry notes. Clearstream,
Luxembourg or the Euroclear System operator, as the case may be, will take any
other action permitted to be taken by Note Owners under the indenture on behalf
of a Clearstream, Luxembourg Participant or Euroclear System Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the related Depositary to effect such actions on its behalf through DTC.
Definitive notes will be issued to Note Owners or their nominees,
rather than to DTC, if:
o the depositor or a responsible officer of the indenture
trustee obtains actual knowledge that DTC is no longer
willing, qualified or able to properly discharge its
responsibilities as nominee and depository with respect to
the book-entry notes and the depositor or the indenture
trustee is unable to locate a qualified successor; or
o after the occurrence of an event of default, Note Owners
representing percentage interests aggregating at least a
majority of the Note Balance of the notes advise DTC through
the financial intermediaries and the DTC Participants in
writing that the continuation of the book-entry system
through DTC, or a successor thereto, is no longer in the best
interests of Note Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all Note
Owners through DTC of the occurrence of such event and the availability of
definitive notes. Upon surrender by DTC of the global certificate or
certificates representing the book-entry notes and instructions for
re-registration, the issuer will issue and the indenture trustee will
authenticate, definitive notes, and thereafter the indenture trustee will
recognize the holders of those definitive notes as "Holders" and "Noteholders"
under the indenture.
Although DTC, Clearstream, Luxembourg and the Euroclear System have
agreed to the foregoing procedures in order to facilitate transfers of notes
between and among Participants of DTC, Clearstream, Luxembourg and the Euroclear
System, they will be under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. See "Risk
Factors--Book-Entry Registration" in this prospectus supplement and "Description
of the Securities--Book-Entry Registration and Form" in the prospectus.
Clearstream, Luxembourg was incorporated in 1970 as "Cedel S.A.," a
company with limited liability under Luxembourg law, or a societe anonyme. Cedel
S.A. subsequently changed its name to Cedelbank. On January 10, 2000,
Cedelbank's parent company, Cedel International, SOCIETE ANONYME ("CI") merged
its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, SOCIETE ANONYME ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel
International decided to re-name the companies in the group in order to give
them a cohesive brand name. The new brand name that was chosen is "Clearstream."
Effective January 14, 2000 New CI has been renamed "Clearstream International,
SOCIETE ANONYME." On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, SOCIETE ANONYME," and Cedel Global Services was renamed "Clearstream
Services, SOCIETE ANONYME."
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On January 17, 2000 DBC was renamed "Clearstream Banking AG." This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking," the entity
previously named "Cedelbank" and the entity previously named "Deutsche Borse
Clearing AG."
Clearstream, Luxembourg holds securities for its customers and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg customers through electronic book-entry changes in
accounts of Clearstream, Luxembourg customers, thereby eliminating the need for
physical movement of certificates. Transactions may be settled by Clearstream,
Luxembourg in any of 36 currencies, including United States Dollars.
Clearstream, Luxembourg provides to its customers, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. Clearstream, Luxembourg
also deals with domestic securities markets in over 30 countries through
established depository and custodial relationships. Clearstream, Luxembourg is
registered as a bank in Luxembourg, and as such is subject to regulation by the
Commission de Surveillance du Secteur Financier, `CSSF', which supervises
Luxembourg banks. Clearstream, Luxembourg's customers are world-wide financial
institutions including underwriters, securities brokers and dealers, banks,
trust companies and clearing corporations. Clearstream, Luxembourg's U.S.
customers are limited to securities brokers and dealers, and banks. Currently,
Clearstream, Luxembourg has approximately 2,000 customers located in over 80
countries, including all major European countries, Canada, and the United
States. Indirect access to Clearstream, Luxembourg is available to other
institutions that clear through or maintain a custodial relationship with an
account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Euroclear Bank S.A./N.V., as the Operator
of the Euroclear System (EOB/EOC) to facilitate settlement of trades between
Clearstream, Luxembourg and EOB/EOC.
PAYMENTS ON THE NOTES
Payments on the notes will be made by the paying agent on the 25th day
of each month, or if such day is not a business day, the next business day,
commencing on July 25, 2003. Payments on the notes will be made to the persons
in the names of which such notes are registered at the close of business on the
related Record Date. See "Description of the Securities--Book-Entry Registration
and Form" in the prospectus. Payments will be made by wire transfer to the
account of the person entitled thereto, which, in the case of book-entry notes,
will be DTC or its nominee, as it appears on the note register, in the amounts
calculated as described in this prospectus supplement on the related
Determination Date. However, the final payment in respect of the notes, if the
notes are no longer book-entry notes, will be made only upon presentation and
surrender thereof at the office or the agency of the paying agent specified in
the notice to noteholders of such final payment.
INTEREST PAYMENTS ON THE NOTES
Interest payments will be made on the notes on each payment date at the
applicable Note Rate for the related Interest Period. If the Note Rate on any
class of notes is based on the applicable Net WAC Rate on any payment date,
there will be Interest Shortfalls on that class of notes. Any Interest Shortfall
created thereby will accrue interest at the applicable Note Rate, as adjusted
from time to time, and will be paid on subsequent payment dates to the extent
Excess Spread is available from the related loan group. Interest Shortfalls will
not be covered by the Policy and may remain unpaid on the Final Payment Date.
Interest payments on the notes will be reduced by any Relief Act
Shortfalls for the related Collection Period and the resulting shortfall will
not be covered by the Policy. Unlike Interest Shortfalls, Relief Act Shortfalls
will not accrue interest and will not be paid on subsequent payment dates, even
if funds are available therefor.
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Interest for the notes will be calculated on the basis of the actual
number of days in the related Interest Period and a 360-day year.
For each payment date, LIBOR will be established by the servicer in the
manner provided for in the definition of LIBOR under "--Glossary of Terms" below
and the servicer will be obligated to provide such information to the auction
agent. The establishment of LIBOR as to each Interest Period by the servicer
will, in the absence of manifest error, be final and binding.
The servicer will calculate the Note Rate on the Class A-I-1 notes and
the Class A-II-1 notes. The Note Rate on the Class A-II-2 notes will be
established by the auction agent on the business day prior to each payment date
based on the auction procedures described in Annex I.
PRINCIPAL PAYMENTS ON THE NOTES
No principal will be payable on the Class A-I-1 notes or the Class A-II
notes during the related Revolving Period, since during these periods, Principal
Collections will be used first to purchase additional balances and/or subsequent
mortgage loans for the related loan group and then to pay any related Additional
Balance Increase Amount. On the payment date immediately succeeding the date on
which a Revolving Period ends, amounts remaining in the related Funding Account
for a loan group, after giving effect to the purchase by the issuer of all
additional balances and subsequent mortgage loans, including any purchase on the
date on which such Revolving Period ends, and payments to the certificateholders
in respect of any related Additional Balance Increase Amount, will be applied as
principal payments on the related notes. On each payment date during a Managed
Amortization Period, principal will be payable on the related class or classes
of notes in an amount equal to Net Principal Collections from the related loan
group for the related Collection Period, less amounts paid to certificateholders
in respect of any related Additional Balance Increase Amount. On each payment
date during the Rapid Amortization Period, principal will be payable on the
related class or classes of notes, in an amount equal to Principal Collections
from the related loan group for the related Collection Period. In addition, on
each payment date following the end of the applicable Revolving Period, to the
extent of funds available therefor, holders of the notes will be entitled to
receive certain additional amounts to be applied in reduction of the Note
Balance until the related overcollateralization amount equals the related
overcollateralization target amount or the total overcollateralization amount
equals the total overcollateralization target amount, as described in this
prospectus supplement, together with any unfunded Liquidation Loss Amounts. All
payments made to the Class A-II-1 notes and the Class A-II-2 notes will be made
on a pro rata basis.
Principal payments on any class of notes on a payment date will not
exceed the outstanding Note Balance on that payment date. On the Final Payment
Date, principal will be due and payable on the notes in an amount equal to the
Note Balance remaining outstanding on that payment date.
PRIORITY OF DISTRIBUTIONS
On each payment date, from amounts withdrawn from the Custodial Account
with respect to the mortgage loans (including any draw on the Policy for that
payment date, which will be used solely for the purposes specified in the
Policy, and any amounts required to be paid under the Yield Maintenance
Agreements), the following payments will be made in the following order of
priority:
DURING EACH OF THE REVOLVING PERIODS, MANAGED AMORTIZATION PERIODS AND
RAPID AMORTIZATION PERIOD, EACH OF THESE FIRST SIX STEPS SHALL OCCUR BEFORE ANY
OTHER DISTRIBUTIONS ON THE NOTES ARE MADE:
o first, from Interest Collections from the related loan group
(exclusive of the pro rata portion of interest attributable to
additional balances represented by any related
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Additional Balance Increase Amount), the amount of the pro rata
portion of the premium for the Policy for the related notes to the
enhancer, and any unpaid related premium with interest thereon, as
provided in the Insurance Agreement;
o second, from any remaining Interest Collections from the related
loan group (exclusive of the pro rata portion of interest
attributable to additional balances represented by any Additional
Balance Increase Amount for the related loan group), to the Note
Payment Account, for payment to the holders of the related notes,
interest for the related Interest Period at the applicable Note
Rate on the Note Balance immediately prior to that payment date,
other than any Interest Shortfalls and reduced by any Relief Act
Shortfalls during the related Collection Period;
o third, from any remaining Interest Collections from the related
loan group, to the Distribution Account, for distribution to the
holders of the certificates, the pro rata portion of interest
collections attributable to additional balances represented by any
Additional Balance Increase Amount for the related loan group, as
a payment of interest on the related Additional Balance Increase
Amount;
o fourth, in the case of the Class A-I-1 notes and the Class A-II-1
notes, from any amounts paid under the related yield maintenance
agreement to pay any Interest Shortfalls on the related class of
notes for such payment date and any prior payment date to the
extent not previously paid, together with interest thereon at the
applicable Note Rate;
o fifth, in the case of the Class A-I-1 notes and the Class A-II-1
notes, from any remaining amounts paid under the other yield
maintenance agreement to pay any Interest Shortfalls on the Class
A-I-1 notes or Class A-II-1 notes, to the extent not previously
paid pursuant to clause fourth above, together with interest
thereon at the applicable Note Rate;
o sixth, from any remaining amounts from the related loan group, to
reimburse the enhancer for prior draws made on the Policy in order
to make interest payments on the related notes, with interest
thereon, as provided in the insurance agreement;
DURING THE REVOLVING PERIOD:
o seventh, from remaining Net Principal Collections from the related
loan group, to the Distribution Account, for distribution to the
holders of the certificates, an amount equal to the related
Additional Balance Increase Amount;
o eighth, any remaining Net Principal Collections to the related
Funding Account;
o ninth, from the Group Excess Spread from each loan group to the
related Funding Account, the aggregate amount of Liquidation Loss
Amounts incurred on the mortgage loans in that loan group in the
related Collection Period, until the Overcollateralization Amount
for that loan group is equal to the related Overcollateralization
Target Amount, but only until the Total Overcollateralization
Amount equals the Total Overcollateralization Target Amount;
o tenth, from the Group Excess Spread from one loan group to the
Funding Account for the other loan group, the aggregate amount of
Liquidation Loss Amounts incurred on the mortgage loans in the
other loan group in the related Collection Period, to the extent
not paid pursuant to clause eighth above, until the
Overcollateralization Amount for that
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other loan group is equal to the related Overcollateralization
Target Amount, but only until the Total Overcollateralization
Amount equals the Total Overcollateralization Target Amount;
o eleventh, from any remaining amounts from the related loan group,
to the enhancer, to reimburse it for prior related draws made on
the Policy, other than with respect to payments of interest on the
related notes, with interest thereon, as provided in the Insurance
Agreement;
o twelfth, on and after the payment date in January 2004, from the
Group Excess Spread from each loan group, to the related Funding
Account, until the Overcollateralization Amount for that loan
group is equal to the related Overcollateralization Target Amount,
but only until the Total Overcollateralization Amount equals the
Total Overcollateralization Target Amount;
o thirteenth, on and after the payment date in January 2004, if the
Total Overcollateralization Amount is less than the Total
Overcollateralization Target Amount, from the Group Excess Spread
from each loan group, to the related Funding Account, until the
Total Overcollateralization Amount is equal to the Total
Overcollateralization Target Amount;
o fourteenth, from any remaining Group Excess Spread from the
related loan group, to the Distribution Account, for distribution
to the holders of the certificates, an amount equal to the related
Additional Balance Increase Amount;
o fifteenth, from any remaining amounts from the related loan group,
to the enhancer, any other amounts owed the enhancer pursuant to
the Insurance Agreement;
o sixteenth, from any remaining Group Excess Spread, to the Note
Payment Account, for payment to the holders of the related notes,
any Interest Shortfalls on the related notes for such payment date
and for any payment date not previously paid, together with
interest thereon at the applicable Note Rate;
o seventeenth, from any remaining Group Excess Spread from either
loan group, to the Distribution Account, for distribution to the
holders of the certificates, an amount equal to the Additional
Balance Increase Amount for either loan group;
o eighteenth, from any remaining amounts, to (i) the indenture
trustee, any Trustee's Additional Expenses and any other amounts
owing to the indenture trustee and (ii) the paying agent, any
amounts owing to the paying agent, in each case to the extent
remaining unpaid; and
o nineteenth, any remaining amounts, to the Distribution Account,
for distribution to the holders of the certificates.
DURING THE MANAGED AMORTIZATION PERIOD, AFTER THE PAYMENTS MADE
PURSUANT TO PRIORITY FIRST THROUGH SIXTH ABOVE:
o seventh, from Net Principal Collections from the related loan
group, to the Distribution Account, for distribution to the
holders of the certificates, an amount equal to the related
Additional Balance Increase Amount;
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o eighth, from any remaining amounts from the related loan group, to
the Note Payment Account, the Principal Distribution Amount, which
includes Liquidation Loss Amounts to the extent described in this
prospectus supplement, for payment to the holders of the related
notes, until the Note Balance of those notes has been reduced to
zero;
o ninth, from any remaining Group Excess Spread from a loan group,
to the Note Payment Account for payment to the holders of the
notes related to the other loan group, the aggregate amount of
Liquidation Loss Amounts included in the Principal Distribution
Amount of that other loan group that were not paid pursuant to
clause seventh above, until the Note Balance of those notes has
been reduced to zero;
o tenth, if the Note Balance of all of the classes of notes related
to a loan group have been reduced to zero, from any remaining
amounts related to the mortgage loans in that loan group, to the
Note Payment Account, any remaining Principal Distribution Amount
for that loan group for payment to the holders of the notes
related to the other loan group, until the Note Balance of those
notes has been reduced to zero;
o eleventh, from any remaining amounts from the related loan group,
to the enhancer, to reimburse it for prior related draws made on
the Policy, other than with respect to payments of interest on the
related notes, with interest thereon, as provided in the Insurance
Agreement;
o twelfth, on and after the payment date in January 2004, from the
Group Excess Spread from each loan group, to the Note Payment
Account, for payment to the holders of the related notes, until
the Overcollateralization Amount for that loan group is equal to
the related Overcollateralization Target Amount but only until the
Total Overcollateralization Amount equals the Total
Overcollateralization Target Amount;
o thirteenth, on and after the payment date in January 2004, if the
Total Overcollateralization Amount is less than the Total
Overcollateralization Target Amount, from the Group Excess Spread
from each loan group, to the Note Payment Account, for payment to
the holders of the related notes, until the Total
Overcollateralization Amount is equal to the Total
Overcollateralization Target Amount;
o fourteenth, from any remaining Group Excess Spread from the
related loan group, to the Distribution Account, for distribution
to the holders of the certificates, an amount equal to the related
Additional Balance Increase Amount;
o fifteenth, from any remaining amounts from the related loan group,
to the enhancer, any other amounts owed the enhancer pursuant to
the Insurance Agreement;
o sixteenth, from any remaining Group Excess Spread from each loan
group, to the Note Payment Account, for payment to the holders of
the related notes, any Interest Shortfalls on the related notes
for such payment date and for any payment date not previously
paid, together with interest thereon at the applicable Note Rate;
o seventeenth, from any remaining Group Excess Spread from either
loan group, to the Distribution Account, for distribution to the
holders of the certificates, an amount equal to the Additional
Balance Increase Amount for either loan group;
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o eighteenth, from any remaining amounts, to (i) the indenture
trustee, any Trustee's Additional Expenses and any other amounts
owing to the indenture trustee and (ii) the paying agent, any
amounts owing to the paying agent, in each case to the extent
remaining unpaid; and
o nineteenth, any remaining amounts, to the Distribution Account,
for distribution to the holders of the certificates.
DURING THE RAPID AMORTIZATION PERIOD, AFTER THE PAYMENTS MADE PURSUANT
TO PRIORITY FIRST THROUGH SIXTH ABOVE:
o seventh, from any remaining amounts from the related loan group,
to the Note Payment Account, the Principal Distribution Amount,
which includes Liquidation Loss Amounts to the extent described in
this prospectus supplement, for payment to the holders of the
related notes, until the Note Balance of those notes has been
reduced to zero;
o eighth, from any remaining Group Excess Spread from a loan group,
to the Note Payment Account for payment to the holders of the
notes related to the other loan group, the aggregate amount of
Liquidation Loss Amounts included in the Principal Distribution
Amount of that other loan group that were not paid pursuant to
clause sixth above, until the Note Balance of those notes has been
reduced to zero;
o ninth, if the Note Balance of all the classes of notes related to
a loan group have been reduced to zero, from any remaining amounts
related to the mortgage loans in that loan group, to the Note
Payment Account, any remaining Principal Distribution Amount for
that loan group for payment to the holders of the notes in the
other loan group, until the Note Balance of those notes has been
reduced to zero;
o tenth, from Principal Collections, to the Distribution Account,
for distribution to the holders of the certificates, an amount
equal to the related Additional Balance Increase Amount;
o eleventh, from any remaining amounts from the related loan group,
to the enhancer, to reimburse it for prior related draws made on
the Policy, other than with respect to payments of interest on the
related notes, with interest thereon, as provided in the Insurance
Agreement;
o twelfth, on and after the payment date in January 2004, from the
Group Excess Spread from each loan group, to the Note Payment
Account, for payment to the holders of the related notes, until
the Overcollateralization Amount for that loan group is equal to
the related Overcollateralization Target Amount but only until the
Total Overcollateralization Amount equals the Total
Overcollateralization Target Amount;
o thirteenth, on and after the payment date in January 2004, if the
Total Overcollateralization Amount is less than the Total
Overcollateralization Target Amount, from the Group Excess Spread
from each loan group, to the Note Payment Account, for payment to
the holders of the related notes, until the Total
Overcollateralization Amount is equal to the Total
Overcollateralization Target Amount;
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o fourteenth, from any remaining Group Excess Spread from the
related loan group, to the Distribution Account, for distribution
to the holders of the certificates, an amount equal to the related
Additional Balance Increase Amount;
o fifteenth, from any remaining amounts from the related loan group,
to the enhancer, any other amounts owed the enhancer pursuant to
the Insurance Agreement;
o sixteenth, from any remaining Group Excess Spread from each loan
group, to the Note Payment Account, for payment to the holders of
the related notes, any Interest Shortfalls on the related notes
for such payment date and for any payment date not previously
paid, together with interest thereon at the applicable Note Rate;
o seventeenth, from any remaining Group Excess Spread from either
loan group, to the Distribution Account, for distribution to the
holders of the certificates, an amount equal to the Additional
Balance Increase Amount for either loan group;
o eighteenth, from any remaining amounts, to (i) the indenture
trustee, any Trustee's Additional Expenses and any other amounts
owing to the indenture trustee and (ii) the paying agent, any
amounts owing to the paying agent, in each case to the extent
remaining unpaid; and
o nineteenth, any remaining amounts, to the Distribution Account,
for distribution to the holders of the certificates.
For purposes of the foregoing, payments made on the Class A-II notes
will be paid to the holders of the Class A-II-1 notes and the Class A-II-2 notes
on a pro rata basis, until the Class A-II notes have been reduced to zero. In
addition, the Note Balances of each class of notes on each payment date during
the Amortization Periods for such class of notes will be reduced by Liquidation
Loss Amounts allocated to that class for that payment date, but only to the
extent that those Liquidation Loss Amounts are not otherwise covered by payments
made pursuant to clauses eighth, ninth, tenth, twelfth or thirteenth during the
Managed Amortization Period or clauses seventh, eighth, ninth, twelfth or
thirteenth during the Rapid Amortization Period, or by a draw on the Policy and
the Total Overcollateralization Amount for that payment date is zero. In the
event of any reduction of the Note Balance of any class of notes, the amount of
the principal reductions allocated to the related notes will be payable to the
noteholders on later payment dates only to the extent of any Excess Spread for
the related loan group remaining on those later payment dates. Liquidation Loss
Amounts that are allocated to the Notes will be allocated to the related class
or classes of notes, and on a pro rata basis between the Class A-II-1 Notes and
the Class A-II-2 Notes in the case of Liquidation Loss Amounts relating to the
group II loans.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO HOLDERS OF CERTIFICATES
Subject to the conditions specified in the servicing agreement, on any
payment date the issuer may, but will not be obligated to, direct the servicer
to remove certain mortgage loans from the trust fund without prior notice to
noteholders. Mortgage loans so designated will be removed only upon satisfaction
of certain conditions specified in the servicing agreement, including, among
other things, that:
o as of the applicable payment date, after giving effect to the
removal of the applicable mortgage loans, the related
Overcollateralization Amount will equal or exceed the related
Overcollateralization Target Amount and the Total
Overcollateralization Amount will equal or exceed the Total
Overcollateralization Target Amount;
o the mortgage loans to be removed are selected at random;
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o the enhancer shall have certain approval rights as set forth in
the servicing agreement;
o notice of the removal of mortgage loans is given to the Rating
Agencies;
o transfers are limited to once a month; and
o transfers cannot exceed the outstanding related Additional Balance
Increase Amount.
OVERCOLLATERALIZATION
The cashflow mechanics of the trust fund are intended to create
overcollateralization by depositing all or a portion of the Excess Spread for
each loan group in the related Funding Account during the applicable Revolving
Period and applying it to acquire additional balances and/or subsequent mortgage
loans and by using all or a portion of the Excess Spread, not otherwise applied
to acquire additional balances and/or subsequent mortgage loans, to pay
certificateholders the related Additional Balance Increase Amount or to
reimburse the Enhancer for prior draws or to make principal payments on the
notes during the Amortization Periods. On and after the payment date occurring
in January 2004, the application of Excess Spread to the related Funding Account
or the related notes, as applicable, will continue until the
overcollateralization amount equals the overcollateralization target amount or
the total overcollateralization amount equals the total overcollateralization
target amount, at which point the application of Excess Spread to the related
Funding Account or the notes, as applicable, will cease unless necessary on a
later payment date to increase the amount of overcollateralization to the target
level. In addition, the Overcollateralization Target Amount may be permitted to
step down in the future, in which case a portion of the Excess Spread will not
be used to acquire additional balances or subsequent mortgage loans or paid to
the holders of the notes but will instead be used for other purposes or
distributed to the holders of the certificates. As a result of these mechanics,
the weighted average lives of the notes will be different than they would have
been in the absence of these mechanics.
The cashflow mechanics of the trust fund are intended to provide
cross-collateralization, to the extent described in this prospectus supplement,
by applying Excess Spread from both loan groups as described above to cover
Liquidation Loss Amounts and to pay principal on the related notes until the
Total Overcollateralization Amount equals the Total Overcollateralization Target
Amount.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization is exhausted and if
payments are not made under the Policy as required, noteholders may incur a loss
on their investments.
THE PAYING AGENT
The paying agent will have the power to withdraw funds from the Note
Payment Account for the purpose of making payments to the noteholders.
MATURITY AND OPTIONAL REDEMPTION
The notes will be payable in full on the Final Payment Date, to the
extent of the aggregate outstanding Note Balance on that date, if any. In
addition, a principal payment may be made in redemption of the notes upon the
exercise by the servicer of its option to purchase the related mortgage loans
together with the related assets of the trust fund. The servicer may exercise
that option after the aggregate outstanding Note Balance of the notes is reduced
to an amount less than 10% of the initial Note Balance. The purchase price of
the mortgage loans that are not REO Loans will be the sum of the outstanding
principal balance of the mortgage loans and accrued and unpaid interest thereon,
at the weighted average of the loan rates of the mortgage loans through the day
preceding the payment date on which the purchase occurs, together with all
amounts due and owing the enhancer with respect to the
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notes and any unpaid Interest Shortfalls on the notes with interest thereon. The
purchase price of the REO Loans will be the sum of the fair market values of the
REO Loans on the payment date on which the purchase occurs. The purchase price
paid by the servicer will also include certain amounts owed by the seller of the
mortgage loans, under the terms of the purchase agreement that remain unpaid on
the date of the redemption. The servicer may not exercise this option to
purchase the mortgage loans unless the total purchase price will provide
sufficient funds to pay the outstanding principal balance, accrued and unpaid
interest on the notes in full, any unpaid Interest Shortfalls on the notes and
interest thereon and all amounts due and owing the enhancer under the insurance
agreement.
THE YIELD MAINTENANCE AGREEMENTS
The holders of the Class A-I-1 notes and the Class A-II-1 notes will
benefit from interest rate cap payments made by Wachovia Bank, National
Association pursuant to the related Yield Maintenance Agreement. Each Yield
Maintenance Agreement is intended to partially mitigate the interest rate risk
that could result from limitations on the related Note Rate by the applicable
Net WAC Rate.
On each payment date through and including the payment date in July
2008, payments under the Yield Maintenance Agreements will be made based on a
notional amount equal to the Notional Balance for the related Yield Maintenance
Agreement for that payment date and the positive excess, if any, of LIBOR over
16%. The Notional Balance for each Yield Maintenance Agreement will not be more
than the outstanding Note Balance of the related class of notes. Payments under
the Yield Maintenance Agreements will be deposited into the Note Payment Account
on each payment date and will be distributed first to the related class of notes
and then to the Class A-I-1 notes or the Class A-II-1 notes, as applicable, to
pay Interest Shortfalls on those notes. Thereafter, payments under the Yield
Maintenance Agreements will be applied to cover other amounts payable on the
related notes that are payable from related Excess Spread, to the extent
available.
Each of the Yield Maintenance Agreements will terminate on the payment
date occurring in July 2008.
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GLOSSARY OF TERMS
Below are abbreviated definitions of significant capitalized terms used
in this prospectus supplement. Capitalized terms used in this prospectus
supplement but not defined in this prospectus supplement shall have the meanings
assigned to them in the accompanying prospectus. The servicing agreement,
indenture and trust agreement may each contain more complete definitions of the
terms used in this prospectus supplement and reference should be made to those
agreements for a more complete understanding of these terms.
"ADDITIONAL BALANCE INCREASE AMOUNT" means for each loan group (a) the
excess, if any, of (i) the aggregate principal amount of additional balances
previously conveyed to the trust fund, over (ii) Principal Collections and
Excess Spread applied to purchase those additional balances from the related
Funding Account and/or the Custodial Account minus (b) amounts paid on previous
payment dates to the holders of the certificates in respect of any related
Additional Balance Increase Amount.
"ALL HOLD RATE" has the meaning described in Annex I to this prospectus
supplement.
"AMORTIZATION PERIODS" means the Managed Amortization Periods and the
Rapid Amortization Period.
"APPRAISED VALUE" means, with respect to any mortgage loan, the
appraised value of the related mortgaged property determined in the appraisal
used in the origination of that mortgage loan, which may have been obtained at
an earlier time, but in no event more than twelve months from origination;
provided that if the mortgage loan was originated simultaneously with a senior
lien on the related mortgaged property, the Appraised Value shall be the lesser
of the appraised value at the origination of the senior lien and the sales price
for the related mortgaged property.
"AUCTION PROCEDURES" means the procedures for conducting an auction
with respect to the Class A-II-2 notes set forth in Annex I to this prospectus
supplement.
"AUCTION RATE" has the meaning described in Annex I to this prospectus
supplement.
"CLASS A-I-1 NET WAC RATE" for each payment date and the Class A-I-1
notes, a fraction, expressed as a per annum rate, the numerator of which is the
sum of (1) the interest due on the mortgage loans in loan group I, less the sum
of (a) the amount of the servicing fee on the mortgage loans in loan group I,
(b) the amount of the pro rata portion of premium on the Policy for the Class
A-I-1 notes, and (c) the pro rata portion of interest attributable to additional
balances represented by any Additional Balance Increase Amount associated with
loan group I, and (2) payments required to be made under the related Yield
Maintenance Agreement in respect of loan group I, if any, and the denominator of
which is the outstanding Note Balance of the Class A-I-1 notes, as adjusted on
the basis of the actual number of days in the related interest period and a
360-day year. The initial Net WAC Rate for the Class A-I-1 notes is 4.7295%.
"CLASS A-II-1 NET WAC RATE" for each payment date and the Class A-II-1
notes, a fraction, expressed as a per annum rate, the numerator of which is the
sum of (1) the product of (i) the interest due on the mortgage loans in loan
group II, less the sum of (a) the amount of the servicing fee on the mortgage
loans in loan group II, (b) the amount of the pro rata portion of premium on the
Policy for the Class A-II notes, and (c) the pro rata portion of interest
attributable to additional balances represented by any Additional Balance
Increase Amount associated with loan group II and (ii) the outstanding Note
Balance of the Class A-II-1 notes divided by the aggregate outstanding Note
Balance of the Class A-II notes, and (2) payments required to be made under the
related Yield Maintenance Agreement in respect of loan group II, if any, and the
denominator of which is the outstanding Note Balance of the Class A-II-1
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notes, as adjusted on the basis of the actual number of days in the related
interest period and a 360-day year. The initial Net WAC Rate for the Class
A-II-1 notes is 4.7262%.
"CLASS A-II-2 NET WAC RATE" for each payment date and the Class A-II-2
notes, a fraction, expressed as a per annum rate, the numerator of which is the
product of (i) the interest due on the mortgage loans in loan group II, less the
sum of (a) the amount of the servicing fee on the mortgage loans in loan group
II, (b) the amount of the pro rata portion of premium on the Policy for the
Class A-II notes, and (c) the pro rata portion of interest attributable to
additional balances represented by any Additional Balance Increase Amount
associated with loan group II and (ii) the outstanding Note Balance of the Class
A-II-2 notes divided by the aggregate outstanding Note Balance of the Class A-II
notes, and the denominator of which is the outstanding Note Balance of the Class
A-II-2 notes, as adjusted on the basis of the actual number of days in the
related interest period and a 360-day year. The initial Net WAC Rate for the
Class A-II-2 notes is 4.7262%.
"CLASS A-II NOTES" means the Class A-II-1 notes and the Class A-II-2
notes.
"CLEARSTREAM, LUXEMBOURG" means Clearstream Banking, SOCIETE ANONYME,
67 Bd Grande-Duchesse Charlotte, L-2967 Luxembourg.
"CLTV RATIO" means, with respect to each mortgage loan, the ratio,
expressed as a percentage of:
(1) the sum of:
o the credit limit thereof; and
o any outstanding principal balance, at the origination of that
mortgage loan, of all other mortgage loans, if any, secured
by senior or subordinate liens on the related mortgaged
property;
OVER
(2) the Appraised Value of that mortgage loan.
"COLLECTION PERIOD" means, with respect to any payment date, the
calendar month preceding the month of that payment date.
"CUSTODIAL ACCOUNT" means the account established pursuant to the
servicing agreement for the deposit of amounts received on the mortgage loans.
"DEFICIENCY AMOUNT" means, with respect to any payment date and the
Class A-I-1 notes or Class A-II notes, as applicable, an amount, if any, equal
to the sum of:
(1) the amount by which the aggregate amount of accrued interest
on the related notes, excluding any Relief Act Shortfalls and
Interest Shortfalls and any amounts required to be paid under
the related Yield Maintenance Agreement for that payment date,
at the applicable Note Rate on that payment date exceeds the
amount available for interest distributions on those notes on
that payment date, including without limitation, from amounts
on deposit in the Note Payment Account; and
(2) (i) with respect to any payment date that is not the Final
Payment Date, to the extent that, after taking into account
all amounts available under the indenture to reduce the Note
Balance of the related notes or to increase the amount on
deposit in the related Funding Account, the Note Balance would
exceed the sum of the aggregate principal balance of the
mortgage loans in the related loan group and the amount on
deposit in the related Funding Account, in each case as of the
close of business on the last day of the related Collection
Period; or
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(ii) on the Final Payment Date, the aggregate outstanding
balance of the notes to the extent otherwise not paid on that
date from amounts available under the indenture, including
without limitation, from amounts on deposit in the Note
Payment Account.
"DELETED LOAN" means a defective mortgage loan that has been removed
from the trust fund pursuant to the terms of the purchase agreement.
"DEPOSITARY" means The Depository Trust Company or DTC.
"DETERMINATION DATE" means the 18th day of each month, or if the 18th
day is not a business day, the next succeeding business day.
"DISTRIBUTION ACCOUNT" means the account established pursuant to the
trust agreement for the deposit of amounts distributable to the holders of the
certificates.
"DRAW PERIOD" means, with respect to each mortgage loan, the period
stated in the related credit line agreement.
"DTC RULES" means the rules, regulations and procedures creating and
affecting DTC and its operations.
"DUE FOR PAYMENT" means, with respect to any Insured Amounts, the
amount thereof that is due and payable under the indenture on the related
payment date.
"ELIGIBLE SUBSTITUTE LOAN" means a mortgage loan substituted by the
seller for a Deleted Loan and assigned to the same loan group as such Deleted
Loan, which mortgage loan must, on the date of the substitution:
o have an outstanding principal balance, or in the case of a
substitution of more than one mortgage loan for a Deleted Loan, an
aggregate outstanding principal balance, not in excess of the
principal balance of the related Deleted Loan;
o have a loan rate, Net Loan Rate and, if applicable, gross margin
no lower than and not more than 1% in excess of the loan rate, Net
Loan Rate and gross margin, respectively, of the related Deleted
Loan;
o have a CLTV Ratio at the time of substitution no higher than that
of the Deleted Loan at the time of substitution;
o have a remaining term to maturity not more than one year earlier
and not later than the remaining term to maturity of the Deleted
Loan;
o comply with each representation and warranty as to the mortgage
loans set forth in the purchase agreement, deemed to be made as of
the date of substitution; and
o satisfy certain other conditions specified in the indenture.
"EXCESS SPREAD" means, with respect to each loan group, the related
Group Excess Spread for that loan group.
"EXCLUDED AMOUNT" means, with respect to each loan group and any
payment date during the Rapid Amortization Period: (i) the portion of the
Principal Collections for each Collection Period allocated to an Excluded Draw
(Principal Collections are to be applied first to the total balance conveyed to
the trust with respect to such mortgage loan and then to the additional balances
on such mortgage loan retained by the seller), and (ii) the pro rata portion
(based on the relative principal amounts held by the trust and by the seller) of
Interest Collections allocable to an Excluded Draw; provided, that the Excluded
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Amount with respect to any Liquidation Loss Amount, shall be the pro rata
portion (based on the relative principal amounts held by the trust and by the
seller) of losses on the related mortgage loans during the related Collection
Period attributable to additional balances not conveyed to the trust fund;
provided further that, to the extent the related credit line agreement or
applicable law provides for a different allocation, such other allocation shall
control.
"EXCLUDED DRAW" means, any draw made by an obligor under any mortgage
loan during the Rapid Amortization Period, which shall not be transferred to the
issuer.
"FINAL PAYMENT DATE" means the payment date occurring in June 2033.
"FUNDING ACCOUNT" means (a) with respect to the Class A-I-1 notes, the
account established by the indenture trustee in its name designated the "Group I
Funding Account" and (b) with respect to the Class A-II notes, the account
established by the indenture trustee in its name designated the "Group II
Funding Account."
"GROUP EXCESS SPREAD" means, with respect to any payment date and loan
group, without taking into account any draws on the Policy for that payment
date, the excess, if any, of:
o Interest Collections (exclusive of the pro rata portion of
interest attributable to additional balances represented by any
Additional Balance Increase Amount) for the related Collection
Period with respect to the mortgage loans in that loan group;
OVER
o the sum of:
(1) the portion of the premium for the Policy for the related
payment date allocable to that loan group, plus any unpaid
related premium from prior payment dates with interest
thereon; and
(2) the amounts paid on that payment date to the holders of the
related notes in respect of interest at the related Note
Rate;
PLUS
payments made under the Yield Maintenance Agreement associated with the
related notes, to the extent not used to pay interest on the notes at the Note
Rate.
"GROUP I REVOLVING PERIOD" means, with respect to the Class A-I-1
notes, the period beginning on the closing date and ending on the earlier of:
o June 30, 2004; and
o the occurrence of a Managed Amortization Event or a Rapid
Amortization Event.
"GROUP II REVOLVING PERIOD" means, with respect to the Class A-II
notes, the period beginning on the closing date and ending on the earlier of:
o June 30, 2004; and
o the occurrence of a Managed Amortization Event or a Rapid
Amortization Event.
"INSURANCE AGREEMENT" means the insurance and indemnity agreement dated
as of the closing date, among the enhancer, the seller, the depositor, the
servicer, the indenture trustee and the issuer.
"INSURED AMOUNT" means, as of any payment date, (i) Deficiency Amounts
for that payment date and (ii) Preference Amounts for that payment date.
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"INSURED PAYMENT" means the payment by the enhancer of any Insured
Amount.
"INTEREST COLLECTIONS" means, with respect to any payment date and
either loan group, an amount equal to the sum of:
o the amounts collected on the related mortgage loans during the
related Collection Period, including the interest portion of Net
Liquidation Proceeds, applied to interest pursuant to the terms of
the related credit line agreements, exclusive of the Excluded
Amount, reduced by the servicing fees for that Collection Period,
plus amounts in respect of any optional servicer advance on the
related mortgage loans pursuant to the terms of the servicing
agreement; and
o the interest portion of:
(1) the Repurchase Price for any Deleted Loans in the related
loan group; and
(2) the applicable portion of the cash purchase price paid in
connection with any optional purchase of the mortgage loans
by the servicer.
"INTEREST PERIOD" means, with respect to any payment date, the period
from the preceding payment date, or, in the case of the first payment date, from
the closing date, through the day preceding that payment date.
"INTEREST SHORTFALL" means, with respect to any payment date on which
LIBOR plus the related margin per annum, in the case of the Class A-I-1 notes or
the Class A-II-1 notes, or the Auction Rate, in the case of the Class A-II-2
notes, exceeds the applicable Net WAC Rate, the sum of (a) the excess of the
amount of interest that would have accrued on that class of notes during the
related Interest Period had the Note Rate been equal to LIBOR plus 0.26% per
annum or the Auction Rate, as applicable, over the amount of interest that
actually accrued on that class of notes during that Interest Period at the
applicable Net WAC Rate; and (b) any amounts required to be paid under the
related Yield Maintenance Agreement, if any, and payable to such class to cover
interest at the Note Rate, which were not paid by the Yield Maintenance
Provider.
"JUNIOR RATIO" means, with respect to each mortgage loan, the ratio,
expressed as a percentage, of the credit limit thereof, to the sum of:
o the credit limit of that mortgage loan; and
o the principal balance of any related senior mortgage loan at
origination of that mortgage loan.
"LIBOR" means, with respect to any Interest Period other than the first
Interest Period, a rate equal to the rate for United States dollar deposits for
one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day, in the case of the Class
A-I-1 notes and the Class A-II-1 notes, and the first LIBOR Business Day, in the
case of the Class A-II-2 notes, prior to the first day of that Interest Period.
With respect to the first Interest Period, LIBOR means a rate equal to the rate
for United States dollar deposits for one month that appears on the Telerate
Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR Business Days
prior to the closing date, in the case of the Class A-I-1 notes and the Class
A-II-1 notes, and one LIBOR Business Day prior to the closing date, in the case
of the Class A-II-2 notes. If no such rate appears on any such date for
determining LIBOR, LIBOR will be the Reference Bank Rate determined by the
servicer. If no Reference Bank Rate is available, LIBOR will be LIBOR applicable
to the preceding payment date.
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"LIBOR BUSINESS DAY" means any day other than:
o a Saturday or a Sunday; or
o a day on which banking institutions in the city of London, England
are required or authorized by law to be closed.
"LIQUIDATION LOSS AMOUNT" means, with respect to any payment date and
any liquidated mortgage loan, the unrecovered principal balance of that
liquidated mortgage loan (excluding the Excluded Amount allocated thereto), at
the end of the related Collection Period in which that mortgage loan became a
liquidated mortgage loan, after giving effect to the Net Liquidation Proceeds in
connection with that liquidated mortgage loan.
"MANAGED AMORTIZATION EVENT" means the event deemed to occur on any
date on which (a) with respect to the Class A-I-1 Notes, the amount on deposit
in the Group I Funding Account exceeds $20,000,000 and (b) with respect to the
Class A-II notes, the amount on deposit in the Group II Funding Account exceeds
$42,500,000.
"MANAGED AMORTIZATION PERIOD" means the period beginning on the day
following the end of the related Revolving Period and ending on the earlier of:
o June 30, 2006; and
o the occurrence of a Rapid Amortization Event.
"MAXIMUM AUCTION RATE" has the meaning described in Annex I to this
prospectus supplement.
"MORTGAGE LOAN FILE" means with respect to each mortgage loan, the
following:
(1) the related credit line agreement endorsed or assigned without
recourse in blank;
(2) the mortgage, or a copy of the mortgage certified by an officer of
the servicer for any mortgage not returned from the public
recording office, with evidence of recording indicated thereon;
and
(3) if applicable, any riders or modifications to the credit line
agreement and mortgage, together with certain other documents at
the times as set forth in the related agreement.
"NET EXCESS SPREAD PERCENTAGE" means for each payment date, a fraction,
expressed as a percentage, the numerator of which is the aggregate amount of
interest on each of the mortgage loans at the applicable Net WAC Rate less the
sum of (i) interest accrued at the applicable Note Rate for the related Interest
Period on the notes and (ii) the portion of Excess Spread applied to cover
Liquidation Loss Amounts, and the denominator of which is the aggregate
outstanding Note Balance of the notes (as adjusted on the basis of the actual
number of days in the related Interest Period and a 360-day year).
"NET LIQUIDATION PROCEEDS" means, with respect to any mortgage loan,
the proceeds, excluding amounts drawn on the Policy, received in connection with
the liquidation of that mortgage loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses (excluding the
Excluded Amount), but not including the portion, if any, of the amount of such
recovery that exceeds the portion of the principal balance of, plus accrued and
unpaid interest on, the mortgage loan at the end of the Collection Period
immediately preceding the Collection Period in which the mortgage loan became a
liquidated mortgage loan.
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"NET LOAN RATE" means, with respect to any payment date and any
mortgage loan, the loan rate of that mortgage loan as of the first day of the
calendar month in which the related Interest Period begins, net of the servicing
fee rate, adjusted to an effective rate reflecting the method by which interest
is calculated on the notes for the related Interest Periods.
"NET PRINCIPAL COLLECTIONS" means, with respect to any payment date,
the excess, if any, of Principal Collections for each loan group for that
payment date over the aggregate amount of additional balances created during the
related Collection Period for that loan group and subsequent mortgage loans
purchased during the related Collection Period for that loan group, and conveyed
to the issuer and paid for with amounts on deposit in the Custodial Account.
"NET WAC RATE" means, the Class A-I-1 Net WAC Rate, the Class A-II-1
Net WAC Rate and the Class A-II-2 Net WAC Rate, as the context requires.
"NOTE BALANCE" means, with respect to any payment date and class of
notes, the initial principal balance of the notes of that class, reduced by all
payments of principal of such notes prior to the related payment date or
reduction thereof by application of related Liquidation Loss Amounts.
"NOTE OWNERS" means Persons acquiring beneficial ownership interests in
the notes.
"NOTE PAYMENT ACCOUNT" means the account established pursuant to the
indenture for the deposit of amounts distributable to the holders of the notes.
"NOTE RATE" means:
(a) with respect to the Class A-I-1 notes and each Interest Period, the
lesser of:
(1) LIBOR plus a margin of 0.26% per annum; and
(2) the Class A-I-1 Net WAC Rate;
(b) with respect to the Class A-II-1 notes and each Interest Period,
the lesser of:
(1) LIBOR plus a margin of 0.26% per annum; and
(2) the Class A-II-1 Net WAC Rate; and
(c) with respect to the Class A-II-2 notes and (i) the initial payment
date, the rate set by the broker-dealer not later than the closing date, which
will not exceed the lesser of the Maximum Auction Rate (as defined in Annex I to
this prospectus supplement) and the Class A-II-2 Net WAC Rate and (ii)
thereafter, will be the lesser of the Auction Rate and the Class A-II-2 Net WAC
Rate.
If the Class A-II-2 notes are no longer held in book-entry form, the
Note Rate will be the lesser of the Maximum Auction Rate and the Class A-II-2
Net WAC Rate.
On any payment date for which a Note Rate has been limited by the
applicable Net WAC Rate, the Interest Shortfall created thereby will accrue
interest at the related Note Rate, as adjusted from time to time, and will be
paid on subsequent payment dates to the extent funds are available therefor.
"NOTIONAL BALANCE" means, with respect to each payment date and the
Yield Maintenance Agreement related to the Class A-I-1 notes or the Class A-II-1
notes, as applicable, the lesser of:
(i) the amount set forth on Schedule I-A-I, in the case of the
Class A-I-1 notes or Schedule I-A-II, in the case of the Class A-II-1 notes,
attached hereto for that payment date; and
(ii) the Note Balance of the related class of notes for that
payment date.
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"OPTIONAL TERMINATION DATE" means the first payment date on which the
Note Balance is less than 10% of the initial Note Balance.
"OVERCOLLATERALIZATION AMOUNT" means with respect to any payment date
and a loan group, the amount, if any, by which the sum of (a) the outstanding
aggregate principal balance of the mortgage loans in the related loan group
(exclusive of the portion relating to any Excluded Draw) and (b) the amount in
the related Funding Account, in each case as of the close of business on the
last day of the related Collection Period, exceeds the aggregate Note Balance of
the related notes.
"OVERCOLLATERALIZATION TARGET AMOUNT" means, with respect to any
payment date and a loan group, an amount equal to the Total
Overcollateralization Target Amount for that payment date, multiplied by a
fraction, the numerator of which is the Note Balance of the related notes as of
the cut-off date (if that payment date is prior to the Stepdown Date), or the
Note Balance of the related notes immediately preceding that payment date (if
that payment date is on or after the Stepdown Date), divided by the Note Balance
of all the notes calculated in accordance with the preceding clause.
"PARTICIPANTS" means participants in DTC, Euroclear or Clearstream,
Luxembourg systems.
"PLAN" means any pension, profit-sharing or other employee benefit plan
and arrangements as well as an individual retirement account and certain types
of Keogh Plans that are subject to ERISA or Section 4975 of the Internal Revenue
Code, including bank collective investment funds and insurance company general
and separate accounts in which those employee benefit plans and arrangements are
invested.
"POLICY" means the financial guaranty insurance policy, and any
endorsement thereto, provided by the enhancer with respect to the notes, dated
as of July 2, 2003.
"PREFERENCE AMOUNT" means any payment of principal or interest on the
notes which has become Due for Payment, the nonpayment of which would have been
covered by the Policy, which is made to a noteholder by or on behalf of the
issuer which has been deemed a preferential transfer and theretofore recovered
from that noteholder pursuant to the United States Bankruptcy Code in accordance
with a final, non-appealable order of a court of competent jurisdiction.
"PRINCIPAL COLLECTIONS" means, with respect to any payment date and
either loan group, an amount equal to the sum of:
o the amount collected on the related mortgage loans during the
related Collection Period, including the principal portion of Net
Liquidation Proceeds, applied to principal pursuant to the terms
of the related credit line agreements, exclusive of the Excluded
Amount; and
o the principal portion of the Repurchase Price for any Deleted
Loans in the related loan group, any amounts required to be
deposited in the Custodial Account by the seller pursuant to the
purchase agreement; and the applicable portion of the cash
purchase price paid in connection with any optional purchase of
the mortgage loans by the servicer.
"PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to each loan group
and any payment date:
o during the Managed Amortization Period, Net Principal Collections
on the related mortgage loans less amounts paid to
certificateholders in respect of any related Additional Balance
Increase Amount for that payment date; and
o during the Rapid Amortization Period, Principal Collections for
the related mortgage loans;
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PROVIDED, that on any payment date during the Amortization Periods, the
Principal Distribution Amount shall also include Excess Spread in an amount
equal to the aggregate Liquidation Loss Amounts, if any, for the mortgage loans
in the related loan group incurred in the related Collection Period, or in any
previous Collection Period to the extent not covered by a payment of principal
on the notes or by the related Overcollateralization Amount, but only to the
extent necessary to increase the Overcollateralization Amount for that loan
group to the related Overcollateralization Target Amount and only up to the
amount necessary such that the Total Overcollateralization Amount equals the
Total Overcollateralization Target Amount.
"RAPID AMORTIZATION EVENT" means the occurrence of any one of the
following events:
(1) the failure on the part of the seller: o to make any payment or
deposit required to be made under the purchase agreement within
three (3) business days after the date the payment or deposit is
required to be made; or
o to observe or perform in any material respect any other
covenants or agreements of the seller set forth in the
purchase agreement, which failure continues unremedied for a
period of sixty (60) days after written notice thereof to the
seller, and the failure materially and adversely affects the
interests of the enhancer or the securityholders; provided,
that a Rapid Amortization Event will not be deemed to occur
if the seller has repurchased or caused to be repurchased or
substituted for the related mortgage loans or all mortgage
loans, as applicable, during that period in accordance with
the provisions of the indenture;
(2) any representation or warranty made by the seller in the purchase
agreement shall prove to have been incorrect in any material
respect when made and shall continue to be incorrect in any
material respect for the related cure period specified in the
servicing agreement after written notice and as a result of which
the interests of the enhancer or the securityholders are
materially and adversely affected; provided, that a Rapid
Amortization Event will not be deemed to occur if the seller has
repurchased or caused to be repurchased or substituted for the
related mortgage loans or all mortgage loans, as applicable,
during that period in accordance with the provisions of the
indenture;
(3) the entry against the seller of a decree or order by a court or
agency or supervisory authority having jurisdiction in the
premises for the appointment of a trustee, conservator, receiver
or liquidator in any insolvency, conservatorship, receivership,
readjustment of debt, marshalling of assets and liabilities or
similar proceedings, or for the winding up or liquidation of its
affairs, and the continuance of any decree or order unstayed and
in effect for a period of sixty (60) consecutive days;
(4) the seller shall voluntarily submit to proceedings under any
federal or state bankruptcy, insolvency or other similar law or
code relating to the seller or relating to all or substantially
all of its property or the seller shall admit in writing its
inability to pay its debts generally as they become due, file a
petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors or voluntarily suspend payment of its obligations;
(5) the issuer becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of
the Investment Company Act of 1940, as amended;
(6) a servicing default occurs and is unremedied under the servicing
agreement and a qualified successor servicer has not been
appointed;
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(7) the occurrence of a draw on the Policy and the failure of the
enhancer to be reimbursed for that draw in accordance with the
Insurance Agreement, which failure continues unremedied for a
period of sixty (60) days after written notice to the servicer;
(8) the issuer is determined to be an association or a publicly traded
partnership taxable as a corporation for federal income tax
purposes;
(9) an event of default under the Insurance Agreement; or
(10) an event of default under the indenture that has occurred and
continues beyond the expiration of any applicable cure period.
In the case of any event described in (1), (2), (6) or (9), a Rapid
Amortization Event will be deemed to have occurred only if, after any applicable
grace period described in those clauses, any of the enhancer, the indenture
trustee, or securityholders evidencing not less than 51% of the Note Balance of
the securities (with the consent of the enhancer), by written notice to the
depositor, the servicer and the owner trustee, and to the indenture trustee, if
given by the securityholders or the enhancer, declare that a Rapid Amortization
Event has occurred as of the date of the notice. In the case of any event
described in clauses (3), (4), (5), (7), (8) or (10), a Rapid Amortization Event
will be deemed to have occurred without any notice or other action on the part
of the indenture trustee, the enhancer or the securityholders immediately upon
the occurrence of the event; provided, that any Rapid Amortization Event may be
waived and deemed of no effect with the consent of the enhancer and each Rating
Agency, subject to the satisfaction of any conditions to that waiver.
"RAPID AMORTIZATION PERIOD" means the period beginning on the earlier
of:
o the first day following the end of the related Managed
Amortization Period; and
o the occurrence of a Rapid Amortization Event;
and ending upon the termination of the issuer.
"RATING AGENCIES" means Moody's Investors Service, Inc. and Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.
"RECORD DATE" means, with respect to the notes and any payment date,
the close of business on the last business day preceding that payment date, and
with respect to the notes if such notes are no longer held in book-entry form,
the last day of the calendar month preceding that payment date.
"REFERENCE BANKS" means major banks in the London interbank market
selected by the paying agent as provided in the indenture.
"REFERENCE BANK RATE" means, with respect to any Interest Period, as
follows: the arithmetic mean (rounded upwards, if necessary, to the nearest one
sixteenth of one percent) of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks as of 11:00 a.m., London,
England time, on the second LIBOR Business Day prior to the first day of such
Interest Period to prime banks in the London interbank market for a period of
one month in amounts approximately equal to the sum of the outstanding Note
Balance of the notes; provided, that at least two Reference Banks provide that
rate. If fewer than two offered rates appear, the Reference Bank Rate will be
the arithmetic mean of the rates quoted by one or more major banks in New York
City, selected by the servicer after consultation with the enhancer, as of 11:00
a.m., New York time, on that date for loans in U.S. Dollars to leading European
banks for a period of one month in amounts approximately equal to the aggregate
Note Balance of the notes. If no quotations can be obtained, the Reference Bank
Rate will be the Reference Bank Rate applicable to the preceding Interest
Period.
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"RELIEF ACT SHORTFALLS" means current interest shortfalls resulting
from the application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"REO LOAN" means a mortgage loan where title to the related mortgaged
property has been obtained by the trustee or its nominee on behalf of the
noteholders.
"REPAYMENT PERIOD" means, with respect to each mortgage loan, the time
period stated in the related credit line agreement during which draws can no
longer be made.
"REPURCHASE PRICE" means, with respect to any mortgage loan, the amount
equal to the principal balance (exclusive of the Excluded Amount) of that
mortgage loan at the time of the removal, plus accrued and unpaid interest on
that principal balance to the date of removal.
"REVOLVING PERIOD" means, either the Group I Revolving Period or the
Group II Revolving Period, as the context requires.
"SECURITIES INTERMEDIARY" means, with respect to each Note Owner, the
brokerage firm, bank, thrift institution or other securities intermediary that
maintains that Note Owner's account.
"STEPDOWN DATE" means, the later to occur of:
o the thirty-first (31st) payment date; or
o the payment date on which the aggregate Note Balance immediately
prior to that payment date is less than or equal to 50% of the
aggregate Note Balance as of the closing date.
"STEPDOWN DELINQUENCY TEST" means, with respect to any date of
determination, a test that is met if the six-month rolling average sixty-day
delinquency rate (including mortgage loans that are in foreclosure or are REO
Loans) on the mortgage loans (exclusive of the pro rata portion relating to any
Excluded Draw) as of such date of determination is less than 3.50%.
"TEASER RATE" means, with respect to each mortgage loan with an
adjustable loan rate, an initial rate less than the sum of the related index and
the related gross margin, which is in effect generally during the first twelve
months of the term of that mortgage loan.
"TELERATE SCREEN PAGE 3750" means the display page so designated on the
Bridge Telerate Capital Markets Report, or such other page as may replace page
3750 on such service for the purpose of displaying London interbank offered
rates of major banks, or, if such service is no longer offered, such other
service for displaying London interbank offered rates or comparable rates as may
be selected by the paying agent after consultation with the servicer.
"TOTAL OVERCOLLATERALIZATION AMOUNT" means the sum of the
Overcollateralization Amount for loan group I and the Overcollateralization
Amount for loan group II.
"TOTAL OVERCOLLATERALIZATION TARGET AMOUNT" means (I) with respect to
any payment date prior to the Stepdown Date, an amount equal to the sum of (i)
1.25% of the aggregate Note Balance as of the closing date; and (ii) 100% of the
principal balances of all mortgage loans that are 180 or more days contractually
delinquent as of the last day of the related Collection Period (including
mortgage loans that are in foreclosure or are REO Loans); and (II) with respect
to any payment date on or after the Stepdown Date as follows:
Condition 1: provided that (a) the Stepdown Delinquency Test
has been met, (b) the two-month rolling average of the Net Excess
Spread Percentage is greater than or equal to 1.00% and (c) the
three-month rolling average of the Net Excess Spread Percentage is
greater than or
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equal to 1.15%, an amount equal to the sum of (i) 2.50% of the
aggregate Note Balance on such Payment Date; and (ii) 100% of the
principal balances of all mortgage loans that are 180 or more days
contractually delinquent as of the last day of the related Collection
Period (including mortgage loans that are in foreclosure or are REO
Loans);
Condition 2: provided that (a) the Stepdown Delinquency Test
has not been met or (b) the two-month rolling average of the Net Excess
Spread Percentage is greater than or equal to 1.00% and the three-month
rolling average of the Net Excess Spread Percentage is less than 1.15%,
an amount equal to the greater of (x) the Total Overcollateralization
Amount as of the immediately preceding payment date (however, in the
case where the Total Overcollateralization Target Amount for the
immediately preceding payment date was determined pursuant to Condition
3, the Total Overcollateralization Target Amount as of the last payment
date prior to entering Condition 3) and (y) the sum of (i) 2.50% of the
aggregate Note Balance on such payment date; and (ii) 100% of the
principal balances of all mortgage loans that are 180 or more days
contractually delinquent as of the last day of the related Collection
Period (including mortgage loans that are in foreclosure or are REO
Loans); or
Condition 3: provided that the two-month rolling average of
the Net Excess Spread Percentage is less than 1.00%, an amount equal to
the sum of (i) 1.25% of the aggregate Note Balance as of the closing
date; and (ii) 100% of the principal balances of all mortgage loans
that are 180 or more days contractually delinquent as of the last day
of the related Collection Period (including mortgage loans that are in
foreclosure or are REO Loans);
PROVIDED, however, that in no event shall the Total
Overcollateralization Target Amount be less than the greater of (x) the sum of
(i) 0.50% of the Note Balance as of the closing date and (ii) 100% of the
principal balances of all mortgage loans that are 180 or more days contractually
delinquent as of the last day of the related Collection Period (including
mortgage loans that are in foreclosure or are REO Loans) and (y) the sum of the
three largest outstanding mortgage loans (by principal balance as of such
payment date).
"TRUSTEE'S ADDITIONAL EXPENSES" means all reasonable out-of-pocket
expenses of the indenture trustee and all amounts owed to the indenture trustee
pursuant to the indemnity of the indenture trustee by the issuer for any and all
loss, liability or expense, including reasonable attorneys' fees and
disbursements, incurred by the indenture trustee in connection with the
administration of the trust estate and the performance of the indenture
trustee's duties.
"TRUST ESTATE" means the mortgage loans included in the assets of the
issuer.
"UNDERWRITING AGREEMENT" means the underwriting agreement, dated the
date of this prospectus supplement, among Wachovia Securities, LLC, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, UBS Securities LLC, and the
depositor.
"WACHOVIA BANK" means Wachovia Bank, National Association.
"YIELD MAINTENANCE AGREEMENT" means, as applicable, either of the yield
maintenance agreements provided by Wachovia Bank, National Association, with
respect to the related class of notes, dated as of July 2, 2003.
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DESCRIPTION OF THE POLICY
The following information has been supplied by the enhancer for
inclusion in this prospectus supplement. Neither the enhancer nor any of its
affiliates accepts any responsibility for the accuracy or completeness of this
prospectus supplement or any information or disclosure contained in this
prospectus supplement, or omitted from this prospectus supplement, other than
with respect to the accuracy of the information regarding the Policy and the
enhancer set forth under the headings "Description of the Policy" and "The
Enhancer" in this prospectus supplement. No representation is made by the
depositor, the servicer, the seller, the paying agent, the indenture trustee,
the underwriter or any of their affiliates as to the accuracy or completeness of
the information in those sections. Additionally, the enhancer makes no
representation regarding the notes or the advisability of investing in the
notes.
The enhancer, in consideration of the payment of a premium and subject
to the terms of the Policy, thereby unconditionally and irrevocably guarantees
to any noteholder that an amount equal to the Insured Amount will be received
from the enhancer by the indenture trustee or its successors, as indenture
trustee for the noteholders, on behalf of the noteholders, for distribution by
the paying agent to each noteholder of that noteholder's proportionate share of
the Insured Amount.
The enhancer's obligations under the Policy, with respect to a
particular Insured Amount, will be discharged to the extent funds equal to the
applicable Insured Amount are received by the indenture trustee, whether or not
those funds are properly applied by the indenture trustee. Insured Amounts will
be paid only at the time set forth in the Policy, and no accelerated Insured
Amounts will be paid regardless of any acceleration of the notes, unless the
acceleration is at the sole option of the enhancer.
Notwithstanding the foregoing paragraph, the Policy will not cover
shortfalls, if any, attributable to the liability of the trust fund or the
indenture trustee for withholding taxes, if any, including interest and
penalties in respect of any liability for withholding taxes, Interest Shortfalls
or Relief Act Shortfalls. In addition, the Policy does not cover any payments
required to be made under the Yield Maintenance Agreements.
The enhancer will pay any Insured Amount that is a Preference Amount on
the second business day following receipt on a business day by the enhancer's
fiscal agent of the following:
o a certified copy of the order requiring the return of a preference
payment;
o an opinion of counsel satisfactory to the enhancer that the order
is final and not subject to appeal;
o an assignment in a form that is reasonably satisfactory to the
enhancer, irrevocably assigning to the enhancer all rights and
claims of the noteholder relating to or arising under the notes
against the debtor which made the preference payment or otherwise
with respect to the preference payment;
o appropriate instruments to effect the appointment of the enhancer
as agent for the noteholder in any legal proceeding related to the
preference payment, which instruments are in a form satisfactory
to the enhancer; and
o a notice as required by the Policy appropriately completed and
executed by the indenture trustee or the related noteholder, as
the case may be;
provided that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the enhancer will be disbursed to the receiver,
conservator, debtor-in-possession or the trustee in bankruptcy named in the
final order of the court exercising jurisdiction on behalf of the noteholder and
not to any noteholder directly unless the
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noteholder has returned principal or interest paid on the notes to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy, in which case that
payment will be disbursed to the indenture trustee for distribution to the
noteholder upon delivery of proof of such payment reasonably satisfactory to the
enhancer.
Notwithstanding the foregoing, in no event shall the enhancer be (1)
required to make any payment under the Policy in respect of any Preference
Amount to the extent such Preference Amount is comprised of amounts previously
paid by the enhancer under the Policy, or (2) obligated to make any payment in
respect of any Preference Amount, which payment represents a payment of the
principal amount of any notes, prior to the time the enhancer otherwise would
have been required to make a payment under the Policy in respect of such
principal, in which case the enhancer shall pay the balance of the Preference
Amount when such amount otherwise would have been required to be paid under the
Policy.
The enhancer will pay any other amount payable under the Policy no
later than 12:00 p.m., New York time, on the later of the payment date on which
the Deficiency Amount is due or the second business day following receipt in New
York, New York on a business day by the enhancer of a notice from the indenture
trustee in the form attached to the Policy specifying the Insured Amount which
is due and owing on the applicable payment date, provided that if the notice is
received after 12:00 p.m., New York time, on that business day, it will be
deemed to be received on the following business day. If any notice received by
the enhancer is not in proper form or is otherwise insufficient for the purpose
of making a claim under the Policy, it will be deemed not to have been received
by the enhancer for the purposes of this paragraph, and the enhancer will
promptly so advise the indenture trustee and the indenture trustee may submit an
amended notice.
Insured Amounts due under the Policy, unless otherwise stated in the
Policy, will be disbursed by the enhancer to the indenture trustee, on behalf of
the noteholders, by wire transfer of immediately available funds in the amount
of the Insured Amount less, in respect of Insured Amounts related to Preference
Amounts, any amount held by the indenture trustee for the payment of the Insured
Amount and legally available therefor.
Subject to the terms of the indenture, the enhancer will be subrogated
to the rights of each noteholder to receive payments under the notes to the
extent of any payment by the enhancer under the Policy.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the meanings set forth in the indenture as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the indenture unless the amendment or modification has been
approved in writing by the enhancer.
The Policy is not cancelable. The premium on the Policy is not
refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the notes.
The Policy is being issued under and pursuant to, and will be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
THE INSURANCE PROVIDED BY THE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
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YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of a note will depend on the price paid by the
related noteholder for that note, the Note Rate, including the Auction Rate, in
the case of the Class A-II-2 notes, the rate and timing of principal payments,
including payments in excess of the monthly payment made by the related
mortgagor, prepayments in full or terminations, liquidations and repurchases, on
the mortgage loans in the related loan group and the rate and timing of draws on
the mortgage loans and the allocations thereof.
In general, if a note is purchased at a premium over its face amount
and payments of principal of such note occur at a rate faster than that assumed
at the time of purchase, the purchaser's actual yield to maturity will be lower
than that anticipated at the time of purchase. Conversely, if a note is
purchased at a discount from its face amount and payments of principal of such
note occur at a rate that is slower than that assumed at the time of purchase,
the purchaser's actual yield to maturity will be lower than originally
anticipated.
With respect to certain mortgage loans, the loan rate at origination
may be below the rate that would result from the sum of the then-applicable
index and gross margin. Under the Wachovia Bank underwriting guidelines,
mortgagors are generally qualified based on an assumed payment which reflects a
rate significantly lower than the maximum rate. The repayment of any mortgage
loan may thus be dependent on the ability of the borrower to make larger
interest payments following the adjustment of the loan rate.
For any mortgage loans secured by junior mortgages, any inability of
the mortgagor to pay off the balance thereof may also affect the ability of the
mortgagor to obtain refinancing at any time of any related senior mortgage loan,
thereby preventing a potential improvement in the mortgagor's circumstances.
Under the servicing agreement the servicer may be restricted or prohibited from
consenting to any refinancing of any related senior mortgage loan in some
circumstances, which in turn could adversely affect the mortgagor's
circumstances or result in a prepayment or default under the corresponding
junior mortgage loan.
In addition to the mortgagor's personal economic circumstances, a
number of factors, including homeowner mobility, job transfers, changes in the
mortgagor's housing needs, the mortgagor's net equity in the mortgaged property,
changes in the value of the mortgaged property, national and regional economic
conditions, enforceability of due-on-sale clauses, prevailing market interest
rates, servicing decisions, solicitations and the availability of mortgage
funds, seasonal purchasing and payment habits of borrowers or changes in the
deductibility for federal income tax purposes of interest payments on home
equity loans, may affect the rate and timing of principal payments on the
mortgage loans or draws on the mortgage loans. There can be no assurance as to
the rate of principal payments on the mortgage loans or draws on the mortgage
loans. The mortgage loans may be prepaid in full or in part without penalty. The
rate of principal payments and the rate of draws may fluctuate substantially
from time to time. Generally, mortgage loans secured by junior liens on the
mortgaged property are not viewed by borrowers as permanent financing. Due to
the unpredictable nature of both principal payments and draws on the mortgage
loans, the rates of principal payments net of draws on the mortgage loans may be
much more volatile than for typical first lien mortgage loans.
The yield to maturity of the notes, and the rate and timing of
principal payments on the mortgage loans or draws on the mortgage loans, may
also be affected by a wide variety of specific terms and conditions applicable
to the respective programs under which the mortgage loans were originated. For
example, the mortgage loans may provide for future draws to be made only in
specified minimum amounts, or alternatively may permit draws to be made by check
in any amount. A pool of mortgage loans including mortgage loans subject to the
latter provisions may be likely to remain outstanding longer with a higher
aggregate principal balance than a pool of mortgage loans including mortgage
loans with
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the former provisions, because of the relative ease of making new draws.
Furthermore, the mortgage loans may provide for interest rate changes on a daily
or monthly basis, or may have gross margins that may vary under certain
circumstances over the term of the loan. In extremely high market interest rate
scenarios, notes backed by mortgage loans including mortgage loans with
adjustable rates subject to substantially higher maximum rates than typically
apply to adjustable rate first mortgage loans may experience rates of default
and liquidation substantially higher than those that have been experienced on
other adjustable rate mortgage loan pools.
As a result of the payment terms of the mortgage loans, there may be no
principal payments made with respect to the mortgage loans associated with a
loan group in any given month. In addition, it is possible that the aggregate
draws on mortgage loans may exceed the aggregate payments with respect to
principal on the mortgage loans for the related period. During the Revolving
Period and the Managed Amortization Period for each loan group, all or a portion
of the Principal Collections on the related mortgage loans will be reinvested in
additional balances, as described in this prospectus supplement, or, with
respect to the related Revolving Period, may be used to purchase subsequent
mortgage loans, or will be accumulated in a trust account pending commencement
of an amortization period with respect to the related notes.
The servicing agreement permits the issuer, at its option, subject to
the satisfaction of certain conditions specified in the servicing agreement, to
direct the servicer to remove certain mortgage loans from the trust fund at any
time during the life of the trust fund, so long as after giving effect to the
removal of the applicable mortgage loans, the related Overcollateralization
Amount equals or exceeds the related Overcollateralization Target Amount and the
Total Overcollateralization Amount equals or exceeds the Total
Overcollateralization Target Amount. Removals of mortgage loans may affect the
rate at which principal is distributed to noteholders by reducing the aggregate
principal balance of the mortgage loans in a loan group and thus the amount of
Principal Collections. See "Description of the Securities--Optional Transfers of
Mortgage Loans to Holders of Certificates" in this prospectus supplement.
The mortgage loans generally will contain due-on-sale provisions
permitting the related mortgagee to accelerate the maturity of a mortgage loan
upon sale or certain transfers by the mortgagor of the underlying mortgaged
property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying mortgaged property and it is entitled to do so under applicable law.
The extent to which mortgage loans are assumed by purchasers of the mortgaged
properties rather than prepaid by the related mortgagors in connection with the
sales of the mortgaged properties will affect the weighted average life of the
notes. See "The Servicing Agreement--Collection and Other Servicing Procedures"
in this prospectus supplement for a description of certain provisions of the
servicing agreement that may affect the prepayment experience on the mortgage
loans.
The servicer may allow the refinancing of a mortgage loan in the trust
fund by accepting prepayments for that mortgage loan and permitting a new loan
to the same borrower secured by a mortgage on the same property, which may be
originated by the servicer or by an unrelated entity. In the event of a
refinancing, the new loan would not be included in the trust fund and,
therefore, the refinancing would have the same effect as a prepayment in full of
the related mortgage loan. The servicer may, from time to time, implement
programs designed to encourage refinancing. These programs may include, without
limitation, modifications of existing loans, general or targeted solicitations,
the offering of pre-approved applications, reduced origination fees or closing
costs, or other financial incentives. Targeted solicitations may be based on a
variety of factors, including the credit of the borrower or the location of the
mortgaged property. In addition, the servicer may encourage refinancing of
mortgage loans, including defaulted mortgage loans, under which creditworthy
borrowers assume the outstanding indebtedness of the defaulted mortgage loans
which may be removed from the trust fund.
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As a result of these programs:
o the rate of principal prepayments of the mortgage loans may be
higher than would otherwise be the case; and
o in some cases, the average credit or collateral quality of the
mortgage loans remaining in the trust fund may decline.
Although the loan rates on the mortgage loans are subject to periodic
adjustments, the adjustments generally:
o will not increase the loan rates over a fixed maximum rate during
the life of any mortgage loan; and
o will be based on an index, which may not rise and fall
consistently with prevailing market interest rates, plus the
related gross margin, which may vary under certain circumstances,
and which may be different from margins being used at the time for
newly originated adjustable rate mortgage loans.
As a result, the loan rates on the mortgage loans at any time may not equal the
prevailing rates for similar, newly originated adjustable rate home equity
mortgage loans and accordingly the rate of principal payments, if any, and draws
on the mortgage loans may be lower or higher than would otherwise be
anticipated. There can be no certainty as to the rate of principal payments on
the mortgage loans or draws on the mortgage loans during any period or over the
life of the notes.
With respect to the indices used in determining the Note Rate and the
loan rates of the mortgage loans, a number of factors affect the performance of
each index and may cause an index to move in a manner different from other
indices. To the extent that LIBOR may reflect changes in the general level of
interest rates less quickly than other indices, in a period of rising interest
rates, increases in the yield to the holders of the notes, which adjust based on
LIBOR, may occur later than that which would be produced by other indices, and
in a period of declining rates, the prime rate, which affects the interest rates
on the mortgage loans, may remain higher than other market interest rates, which
may result in a higher level of prepayments of the mortgage loans that adjust in
accordance with the prime rate than of mortgage loans which adjust in accordance
with other indices.
The Auction Rate on the Class A-II-2 notes will be determined by the
Auction Procedures. If there are not sufficient bids for the Class A-II-2 notes
at a rate at which the holder of the Class A-II-2 notes would desire to sell,
the holder will be required to hold their Class A-II-2 notes for an indefinite
period of time. In addition, if the Class A-II-2 notes are no longer held in
book-entry form, the applicable Note Rate will not be determined in accordance
with the Auction Procedures and will be the lesser of the Maximum Auction Rate
and the applicable Net WAC Rate.
The Note Rates on the notes are subject to a cap equal to the
applicable Net WAC Rate. Because the applicable Net WAC Rate is reduced to
account for interest on the related Additional Balance Increase Amount, which is
paid to the certificateholders, the applicable Net WAC Rate will be affected by
the size of such Additional Balance Increase Amount. To the extent the
applicable Net WAC Rate becomes the applicable Note Rate, less interest will
accrue on the notes than would otherwise be the case if the Note Rate were not
subject to a cap. The prepayment of mortgage loans with higher mortgage rates
will increase the likelihood that the notes will be subject to the applicable
Net WAC Rate. The holders of the notes will be entitled to recover Interest
Shortfalls on any payment date from excess cash flow, if available. There can be
no assurance that excess cash flow will be available to pay any such amounts.
The Policy does not cover any
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Interest Shortfalls. The Yield Maintenance Agreements are intended to partially
mitigate the interest rate risk that could result from limitations on the Note
Rate on the Class A-I-1 notes and the Class A-II-1 notes by the applicable Net
WAC Rate. The Policy does not cover any payments that are required to be made
under either Yield Maintenance Agreement. If payments are not made as required
under a Yield Maintenance Agreement, those amounts will only be paid if excess
cash flow is available for that purpose. Each Yield Maintenance Agreement will
terminate on the payment date occurring in July 2008. The Class A-II-2 notes
will not receive payments under either of the Yield Maintenance Agreements.
The timing of changes in the rate of principal payments on a note may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments experienced over time is consistent with an
investor's expectation. In general, the earlier a payment of principal on a
note, the greater will be the effect on an investor's yield to maturity. As a
result, the effect on an investor's yield of principal payments occurring at a
rate higher or lower than the rate anticipated by the investor during the period
immediately following the issuance of the notes would not be fully offset by a
subsequent like reduction or increase in the rate of principal payments.
The rate and timing of defaults on the mortgage loans will also affect
the rate and timing of principal payments on the mortgage loans and thus the
yield on the related notes. There can be no assurance as to the rate of losses
or delinquencies on any of the mortgage loans, however, the rate of losses and
delinquencies are likely to be higher than those of traditional first lien
mortgage loans, particularly in the case of mortgage loans with high CLTV Ratios
or low Junior Ratios. To the extent that any losses are incurred on any of the
mortgage loans that are not covered by the applicable credit enhancements,
holders of the notes will bear all risk of losses resulting from default by
mortgagors. Even where the Policy covers all losses incurred on the mortgage
loans, the effect of losses may be to increase prepayment rates on the mortgage
loans, thus reducing the weighted average life and affecting the yield to
maturity.
Amounts on deposit in the applicable Funding Account may be used during
the related Revolving Period to acquire additional balances and subsequent
mortgage loans for inclusion in the related loan group. In the event that at the
end of a Revolving Period any amounts on deposit in a Funding Account have not
been used to acquire additional balances or subsequent mortgage loans for the
related loan group, or to make payments to the certificateholders in respect of
any related Additional Balance Increase Amount, the related notes will be
prepaid in part on the following payment date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
that security, assuming no losses. The weighted average life of the notes will
be influenced by, among other factors, the rate of principal payments and the
rate of draws on the mortgage loans in the related loan group.
The primary source of information available to investors concerning the
notes will be the monthly statements discussed in this prospectus supplement
under "Description of the Agreements--The Trust Agreement and the
Indenture--Reports to Noteholders," which will include information as to the
outstanding Note Balance. There can be no assurance that any additional
information regarding the notes will be available through any other source. In
addition, the depositor is not aware of any source through which price
information about the notes will be generally available on an ongoing basis. The
limited nature of information regarding the notes may adversely affect the
liquidity of the notes, even if a secondary market for the notes becomes
available.
The prepayment model used in this prospectus supplement, or prepayment
assumption, represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. The prepayment
assumption model assumes the constant prepayment rate, or CPR, of the then
outstanding principal balance of the mortgage loans specified. The prepayment
assumption does
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not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the mortgage loans.
The tables set forth below are based on a CPR, a constant draw rate,
which, for purposes of the assumptions, is the amount of additional balances
drawn each month as an annualized percentage of the aggregate principal balance
of the mortgage loans outstanding at the beginning of that month, and optional
termination assumptions as indicated in the tables below and further assume that
the mortgage loans consist of mortgage loans having the following
characteristics:
ASSUMED CHARACTERISTICS
GROUP I MORTGAGE LOANS
FULLY
GROSS NET ORIGINAL REMAINING INDEXED MAXIMUM MONTHS TO CREDIT
LOAN NUMBER BALANCE WAC (%) WAC TERM TERM MARGIN RATE TEASER UTILIZATION RATE
($) (%) (MONTHS) (MONTHS) (%) (%) EXPIRATION (%)
1 18,844,151.78 3.7500 3.2500 238 233 -0.5000 17.1831 0 71.87
2 232,817,916.11 4.2285 3.7285 234 229 -0.0217 17.7249 0 53.65
3 148,337,965.87 4.4176 3.9176 237 232 0.6503 17.6784 10 60.65
GROUP II MORTGAGE LOANS
FULLY
GROSS NET ORIGINAL REMAINING INDEXED MAXIMUM MONTHS TO CREDIT
LOAN NUMBER BALANCE WAC(%) WAC TERM TERM MARGIN RATE TEASER UTILIZATION RATE
($) (%) (MONTHS) (MONTHS) (%) (%) EXPIRATION (%)
1 28,362,119.72 3.7500 3.2500 238 233 -0.5000 17.1897 0 69.92
2 558,900,835.98 4.2385 3.7385 230 225 -0.0116 17.7452 0 54.18
3 262,770,340.98 4.4040 3.9040 235 230 0.6401 17.7646 9 58.75
In addition, it was assumed that:
(1) payments are made in accordance with the description set forth in
this prospectus supplement under "Description of the
Securities--Priority of Distributions";
(2) payments on the notes will be made on the 25th day of each
calendar month regardless of the day on which the payment date
actually occurs, commencing on July 25, 2003;
(3) the assumed scheduled maturity date, original term and remaining
term are modeling assumptions based on the draw terms of the
mortgage loans;
(4) no delinquencies or defaults occur;
(5) monthly draws and prepayments are calculated as set forth in the
tables below simultaneously, based on the prior month's ending
balance;
(6) the mortgage loans pay on the basis of 30 days in the related
accrual period and a 360-day year;
(7) no Rapid Amortization Event occurs;
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(8) each mortgage loan is payable monthly;
(9) the closing date is July 2, 2003;
(10) LIBOR is equal to 1.0575% per annum and the prime rate used for
calculating the interest rate on the mortgage loans is 4.250%; and
(11) the initial Note Balances are as set forth on page S-6 of this
prospectus supplement.
The actual characteristics and performance of the mortgage loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
draw scenarios. For example, it is very unlikely that the mortgage loans will
prepay and/or experience draws at a constant rate until maturity or that all
mortgage loans will prepay and/or experience draws at the same rate. Moreover,
the diverse remaining terms to stated maturity of the mortgage loans could
produce slower or faster principal distributions than indicated in the tables at
the various assumptions specified, even if the weighted average remaining term
to stated maturity of the mortgage loans is as assumed. Any difference between
these assumptions and the actual characteristics and performance of the mortgage
loans, or actual prepayment experience, will affect the percentages of initial
Note Balances outstanding over time and the weighted average life of the notes.
Neither the CPR model nor any other prepayment model or assumption purports to
be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
mortgage loans included in the mortgage pool. Variations in the actual
prepayment experience and the principal balances of the mortgage loans that
prepay may increase or decrease each weighted average life shown in the
following tables. These variations may occur even if the average prepayment
experience of all mortgage loans equals the CPR, as indicated.
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PERCENTAGE OF INITIAL CLASS A-I-1 NOTE BALANCE(1)(2)
PAYMENT DATE PERCENTAGE OF BALANCE
- ------------------------------------------ ------------------------------------------------------------------------
CPR 10% 20% 30% 38% 50% 60% 70%
- ------------------------------------------ --------- --------- ---------- --------- ---------- --------- ----------
Initial 100 100 100 100 100 100 100
June 2004 100 100 100 87 70 56 43
June 2005 100 100 96 76 49 32 18
June 2006 100 100 95 66 35 18 8
June 2007 82 67 61 36 14 5 1
June 2008 63 31 28 10 0 0 0
June 2009 45 0 0 0 0 0 0
June 2010 26 0 0 0 0 0 0
June 2011 8 0 0 0 0 0 0
June 2012 0 0 0 0 0 0 0
Weighted Average Life to
10% call (years)......................... 5.71 4.48 4.29 3.25 2.17 1.56 1.09
Weighted Average Life to
maturity (years)......................... 5.75 4.49 4.31 3.26 2.20 1.61 1.16
(1) Assumes (i) except where indicated, that no optional termination
is exercised and (ii) a CPR as disclosed above less a constant
draw rate of 29%.
(2) All percentages are rounded to the nearest 1%.
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PERCENTAGE OF INITIAL CLASS A-II NOTE BALANCE(1)(2)
PAYMENT DATE PERCENTAGE OF BALANCE
- ---------------------------------------------------------------------------------------------
CPR 10% 20% 30% 38% 50% 60% 70%
- ---------------------------------------------------------------------------------------------
Initial 100 100 100 100 100 100 100
June 2004 100 100 100 87 70 56 43
June 2005 100 100 96 76 49 32 18
June 2006 100 100 95 66 35 18 8
June 2007 81 67 61 36 14 5 1
June 2008 62 30 28 10 0 0 0
June 2009 44 0 0 0 0 0 0
June 2010 25 0 0 0 0 0 0
June 2011 6 0 0 0 0 0 0
June 2012 0 0 0 0 0 0 0
Weighted Average Life to
10% call (years).................... 5.68 4.48 4.29 3.25 2.17 1.56 1.09
Weighted Average Life to
maturity (years).................... 5.71 4.49 4.31 3.26 2.20 1.61 1.16
(1) Assumes (i) except where indicated, that no optional termination is
exercised and (ii) a CPR as disclosed above less a constant draw
rate of 29%.
(2) All percentages are rounded to the nearest 1%.
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THE AGREEMENTS
THE PURCHASE AGREEMENT
The mortgage loans to be transferred to the issuer by the depositor
were or will be purchased by the depositor from the seller pursuant to the
mortgage loan purchase agreement, referred to in this prospectus supplement as
the purchase agreement, dated as of the cut-off date, among the seller, the
depositor, the issuer and the indenture trustee. The following summary describes
certain terms of the purchase agreement. The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the purchase agreement. See "Description of the Agreements" in the
prospectus.
PURCHASE OF MORTGAGE LOANS
Under the purchase agreement, the seller has agreed to transfer and
assign, without recourse, to the depositor the initial mortgage loans and
related additional balances, and the Mortgage Loan Files. Pursuant to an
assignment by the depositor executed on the closing date, upon the transfer to
the depositor, the initial mortgage loans will be transferred, without recourse,
by the depositor to the issuer, as well as the depositor's rights in, to and
under the purchase agreement, which will include the obligation, except during
the Rapid Amortization Period, to purchase additional balances relating to the
initial mortgage loans. The owner trustee, on behalf of the trust fund, will,
concurrently with the assignment, grant a security interest in the trust fund to
the indenture trustee to secure the notes. Subsequent mortgage loans may also be
purchased by the depositor from the seller during the Revolving Periods,
pursuant to subsequent transfer agreements as set forth in the purchase
agreement. Upon the transfer to the depositor, the subsequent mortgage loans
will be transferred, without recourse, by the depositor to the issuer, as well
as the depositor's rights in, to and under the applicable subsequent transfer
agreement with the seller (which will include the obligation, except during the
Rapid Amortization Period, to purchase additional balances relating to the
subsequent mortgage loans). The issuer will pay for these subsequent mortgage
loans from funds on deposit in the related Funding Account. The purchase
agreement will provide that the subsequent mortgage loans must conform to
certain specified characteristics described above under "Description of the
Mortgage Loans--The Funding Account; Conveyance of Additional Balances and
Subsequent Mortgage Loans." For a general description of the seller, see "The
Seller and Servicer" in this prospectus supplement. The purchase price of the
initial mortgage loans is a specified amount payable by the depositor, as
provided in the purchase agreement. The purchase price paid for any subsequent
mortgage loans by the indenture trustee, at the direction of the issuer, from
amounts on deposit in the related Funding Account shall be one hundred percent
(100%) of the aggregate principal balances of the subsequent mortgage loans as
of the date so transferred, as identified on the mortgage loan schedule attached
to the related subsequent transfer agreement provided by the depositor. The
purchase price of each additional balance is the amount of the related new
advance and is payable by the issuer, in cash, including withdrawals from the
related Funding Account for the loan group and any amount contributed or from
payments to certificateholders in respect of the related Additional Balance
Increase Amount, as provided in the purchase agreement and the indenture.
The purchase agreement will require that, within a specified time
period, the seller will deliver to the servicer, as agent for the indenture
trustee, with respect to each mortgage loan and any modification or amendment
thereto, the related Mortgage Loan File.
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REPRESENTATIONS AND WARRANTIES
The seller will represent and warrant to the depositor that, among
other things, as of the closing date or, the related subsequent transfer date
with respect to any subsequent mortgage loans:
o the information set forth in a schedule of the related mortgage
loans is true and correct in all material respects as of the date
or dates respecting which the information is furnished;
o immediately prior to the sale of the initial mortgage loans to the
depositor and the subsequent mortgage loans to the issuer, the
seller was the sole owner and holder of the mortgage loans free and
clear of any and all liens and security interests;
o the purchase agreement constitutes a valid transfer and assignment
of all right, title and interest of the seller in and to the
initial mortgage loans or the subsequent mortgage loans, as
applicable, and the proceeds thereof;
o at the time it was made, each mortgage loan complied in all
material respects with all applicable local, state and federal
laws, including predatory lending laws;
o as of the cut-off date, with respect to the initial mortgage loans,
or related subsequent cut-off date, with respect to any subsequent
mortgage loans, no mortgage loan is 30 days or more delinquent in
payment of principal and interest;
o to the best of the seller's knowledge, there is no delinquent
recording or other tax or fee or assessment lien against any
related mortgaged property;
o none of the mortgage loans are subject to the Home Ownership and
Equity Protection Act of 1994;
o none of the mortgage loans are "high cost home loans" under the
Georgia Fair Lending Act and no mortgage loans that are secured by
mortgaged property in Georgia and were originated between October
1, 2002 and March 7, 2003 are subject to the Georgia Fair Lending
Act;
o none of the mortgage loans are "high cost home loans" under the New
York Predatory Lending Law, codified as N.Y. Banking Lawss.6-I,
N.Y. Gen. Bus. Lawss.771-a, and N.Y. Real Prop. Acts Law ss.1302;
o none of the proceeds of any mortgage loan were used to purchase
single-premium credit life insurance policies;
o no mortgage loan originated on or after October 1, 2002 will impose
a prepayment premium for a term in excess of three years; and
o no mortgage loan provides for a prepayment premium for a period in
excess of five years after the origination date.
The depositor will assign to the issuer all of its right, title and
interest in the purchase agreement and each subsequent transfer agreement,
insofar as the purchase agreement and each subsequent transfer agreement relates
to the representations and warranties made by the seller in respect of the
initial mortgage loans and the subsequent mortgage loans and any remedies
provided for with respect to any breach of the representations and warranties.
The representations and warranties of the seller will be assigned by the issuer
to the indenture trustee for the benefit of the noteholders and the enhancer,
and
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therefore a breach of the representations and warranties of the seller will be
enforceable on behalf of the trust. If the seller cannot cure a breach of any
representation or warranty made by it in respect of a mortgage loan which
materially and adversely affects the interests of the noteholders or the
enhancer in that mortgage loan, within 90 days after notice from the servicer,
the seller will be obligated to repurchase the mortgage loan at the Repurchase
Price.
As to any mortgage loan required to be purchased by the seller as
provided above, rather than purchase the mortgage loan, the seller may, at its
sole option, remove the Deleted Loan from the trust fund and substitute in its
place an Eligible Substitute Loan.
REVIEW OF MORTGAGE LOANS
Within 90 days following the delivery of a Mortgage Loan File to the
servicer, the servicer will review or cause to be reviewed the Mortgage Loan
File. If any Mortgage Loan File is found to be defective in any material respect
which may materially and adversely affect the value of the related mortgage loan
or the interests of the indenture trustee, as pledgee of the trust fund, the
securityholders or the enhancer in that mortgage loan and the defect is not
cured within 90 days following notification thereof to the seller and the issuer
by the servicer, the seller will be obligated under the purchase agreement to
deposit the Repurchase Price into the Custodial Account. In lieu of any deposit
into the Custodial Account, the seller may substitute an Eligible Substitute
Loan. Any purchase or substitution will result in the removal of the defective
mortgage loan from the trust fund. The obligation of the seller to remove a
Deleted Loan from the trust fund is the sole remedy regarding any defects in the
mortgage loans and Mortgage Loan Files available to the issuer, the enhancer,
the certificateholders, or the owner trustee on behalf of the
certificateholders, and the noteholders, or the indenture trustee on behalf of
the noteholders, against the seller. Any mortgage loan not so purchased or
substituted for shall remain in the trust fund.
THE SERVICING AGREEMENT
The following summary describes certain terms of the servicing
agreement. The summary does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the provisions of the servicing
agreement. See "Description of the Agreements" in the prospectus.
All of the mortgage loans will initially be serviced by the servicer,
but may be subserviced by one or more subservicers designated by the servicer
pursuant to subservicing agreements between the servicer and any future
subservicers. For a general description of the servicer and its activities, and
certain information concerning the servicer's delinquency experience on
residential mortgage loans, see "The Seller and Servicer--Delinquency and Loss
Experience of the Servicer's Portfolio" in this prospectus supplement.
PRINCIPAL COLLECTIONS AND INTEREST COLLECTIONS
All collections on the mortgage loans will generally be allocated in
accordance with the related credit line agreements between amounts collected in
respect of interest and amounts collected in respect of principal and to the
extent not specified in the related credit line agreement, collections will
generally be applied first to interest and then to principal.
The servicer will be required to establish and maintain the Custodial
Account. On each Determination Date, the servicer will determine the aggregate
amounts required to be withdrawn from the Custodial Account and deposited into
the Note Payment Account, the applicable Funding Account and the Distribution
Account prior to the close of business on the business day next succeeding each
Determination Date.
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The servicer will make withdrawals from the Custodial Account,
including but not limited to the following, and deposit the withdrawn amounts as
follows:
o to pay to itself or the seller various reimbursement amounts and
other amounts as provided in the servicing agreement (including any
amounts owed to the indenture trustee pursuant to the indenture);
o to the applicable Funding Account, amounts required to be deposited
therein;
o to the Distribution Account, amounts for distribution to the
certificateholders; and
o to the Note Payment Account, an amount equal to the portion of
Principal Collections and Interest Collections required to be paid
to the holders of the notes on the business day prior to each
payment date.
COLLECTION AND OTHER SERVICING PROCEDURES
The servicer will make reasonable efforts to collect all payments
called for under the mortgage loans and will, consistent with the servicing
agreement, follow collection procedures which shall be normal and usual in its
general mortgage servicing activities with respect to mortgage loans comparable
to the mortgage loans included in the mortgage pool. Consistent with that
standard, the servicer may in its discretion waive any prepayment charge in
connection with the prepayment of a mortgage loan or extend the due dates for
payments due on a mortgage loan, provided that the insurance coverage for that
mortgage loan or any coverage provided by any alternative credit enhancement
will not be adversely affected by the waiver or the extension.
The servicer, at its option and in its sole discretion, may make
advances by depositing into the Custodial Account amounts representing
installments of principal and/or interest on any mortgage loan that is
delinquent as of the end of the related Collection Period if the servicer
believes that the advances will be recoverable from payments on, or other
proceeds of, that mortgage loan. If the servicer makes any optional advances of
delinquent principal and/or interest, the servicer shall be entitled to
reimburse itself from collections on the mortgage loans, or if those amounts are
not sufficient, by withdrawing those amounts from the Custodial Account prior to
any distribution of amounts on deposit therein to the noteholders.
In addition, in certain instances in which a mortgage loan is in
default, or if default is reasonably foreseeable, and if determined by the
servicer to be in the best interests of the enhancer and the noteholders, the
servicer may permit certain modifications of the mortgage loan or make
forbearances on the mortgage loan rather than proceeding with foreclosure or
repossession, if applicable. In making the determination, the loss that might
result if the mortgage loan were liquidated would be taken into account. Any
modifications may have the effect of reducing the loan rate or extending the
final maturity date of the mortgage loan. Any modified mortgage loan may remain
in the trust fund, and the reduction in collections resulting from the
modification may result in reduced distributions of interest, or other amounts,
on, or may extend the final maturity of, the notes. In addition, if a mortgage
loan is in default or, in the judgment of the servicer a default is reasonably
foreseeable, the servicer may, through modification, convert the mortgage loan
into a fully amortizing home equity loan.
In any case in which mortgaged property subject to a mortgage loan is
being conveyed by the mortgagor, the servicer shall in general be obligated, to
the extent it has knowledge of the conveyance, to exercise its rights to
accelerate the maturity of the mortgage loan under any due-on-sale clause
applicable thereto, but only if the exercise of those rights is permitted by
applicable law and only to the extent it would not adversely affect or
jeopardize coverage under any applicable credit enhancement arrangements. If the
servicer is prevented from enforcing the due-on-sale clause under applicable law
or if the servicer determines that it is reasonably likely that a legal action
would be instituted by the related mortgagor to
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avoid enforcement of the due-on-sale clause, the servicer will enter into an
assumption and modification agreement with the person to whom the property has
been or is about to be conveyed, pursuant to which that person will become
liable under the related credit line agreement subject to certain specified
conditions. The original mortgagor may be released from liability on a mortgage
loan if the servicer shall have determined in good faith that the release will
not adversely affect the ability to make full and timely collections on the
related mortgage loan. Any fee collected by the servicer for entering into an
assumption or substitution of liability agreement will be retained by the
servicer as additional servicing compensation. In connection with any
assumption, the loan rate borne by the related credit line agreement may not be
altered.
Mortgagors may, from time to time, request partial releases of the
mortgaged properties, easements, consents to alteration or demolition and other
similar matters. The servicer may approve such a request if it has determined,
exercising its good faith business judgment in the same manner as it would if it
were the owner of the related mortgage loan, that the approval will not
adversely affect the security for, and the timely and full collectability of,
the related mortgage loan. Any fee collected by the servicer for processing the
request will be retained by the servicer as additional servicing compensation.
The servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the servicer in connection with its activities under the
servicing agreement.
The servicer may be subject to certain restrictions under the servicing
agreement with respect to the refinancing of a lien senior to a mortgage loan
secured by a lien on the related mortgaged property. In addition, if a mortgaged
property did not have a lien senior to the related mortgaged loan as of the
cut-off date, then the servicer may not consent to the placing of a lien senior
to the mortgage loan on the related mortgaged property.
REALIZATION UPON DEFAULTED LOANS
With respect to a mortgage loan secured by a lien on a mortgaged
property in default, the servicer will decide whether to foreclose upon the
mortgaged property or with respect to that mortgage loan, write off the
principal balance of the mortgage loan as a bad debt or take an unsecured note,
provided, however, that if the servicer has actual knowledge that any mortgaged
property is affected by hazardous or toxic wastes or substances and that the
acquisition of the mortgaged property would not be commercially reasonable, then
the servicer shall not cause the issuer or the indenture trustee to acquire
title to that mortgaged property in a foreclosure or similar proceeding. In
connection with that decision, the servicer will, following usual practices in
connection with senior and junior mortgage servicing activities or repossession
and resale activities, estimate the proceeds expected to be received and the
expenses expected to be incurred in connection with the foreclosure or
repossession and resale to determine whether a foreclosure proceeding or a
repossession and resale is appropriate. To the extent that a mortgage loan
secured by a lien on a mortgaged property is junior to another lien on the
related mortgaged property, following any default thereon, unless foreclosure
proceeds for that mortgage loan are expected to at least satisfy the related
senior mortgage loan in full and to pay foreclosure costs, it is likely that the
mortgage loan will be written off as bad debt with no foreclosure proceeding.
See "Risk Factors--The mortgaged properties might not be adequate security for
the mortgage loans" in this prospectus supplement. In the event that title to
any mortgaged property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale will be issued to the indenture
trustee or to its nominee on behalf of the noteholders. Notwithstanding any
acquisition of title and cancellation of the related mortgage loan, the REO Loan
will be considered for most purposes to be an outstanding mortgage loan held in
the trust fund until such time as the mortgage loan becomes a liquidated
mortgage loan. Any income, net of expenses and fees and other than gains
described below, received by the servicer on the related mortgaged property,
prior to its disposition will be deposited in the Custodial Account upon
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receipt and will be available at that time for making payments to noteholders.
The foregoing is subject to the proviso that the servicer shall not be required
to expend its own funds in connection with any foreclosure or attempted
foreclosure which is not completed or towards the correction of any default on a
related senior mortgage loan or restoration of any property unless it shall
determine that the expenditure will increase the related Net Liquidation
Proceeds.
With respect to a mortgage loan secured by a lien on a mortgaged
property in default, the servicer may pursue foreclosure, or similar remedies,
subject to any senior lien positions and certain other restrictions pertaining
to junior loans concurrently with pursuing any remedy for a breach of a
representation and warranty made by the seller or the depositor. However, the
servicer is not required to continue to pursue both remedies if it determines
that one remedy is more likely to result in a greater recovery. Upon the first
to occur of final liquidation and a repurchase or substitution pursuant to a
breach of a representation and warranty, the related mortgage loan will be
removed from the trust fund. The servicer may elect to treat a defaulted
mortgage loan as having been finally liquidated if substantially all amounts
expected to be received in connection therewith have been received. However, the
servicer may continue to pursue recovery on the mortgage loans. In that case,
the servicer will continue to be entitled to receive a servicing fee for that
mortgage loan and any additional liquidation expenses, including a customary
recovery fee, relating to that mortgage loan thereafter incurred will be
reimbursable to the servicer from any amounts otherwise payable to the
noteholders, or may be offset by any subsequent recovery related to that
mortgage loan. Alternatively, for purposes of determining the amount of related
liquidation proceeds to be paid to noteholders, the amount of any loss or the
amount required to be drawn under any applicable form of credit enhancement, the
servicer may take into account minimal amounts of additional receipts expected
to be received, as well as estimated additional liquidation expenses expected to
be incurred in connection with the defaulted mortgage loan.
NON-RECORDATION OF ASSIGNMENTS; POSSESSION OF MORTGAGES
Subject to the conditions described in the servicing agreement, the
seller will not be required to prepare or record assignments of the mortgages to
the indenture trustee in the real property records of the states in which the
related mortgaged properties are located. The seller will retain record title to
the mortgages on behalf of the indenture trustee and the securityholders.
Although the recordation of the assignments of those mortgages in favor of the
indenture trustee is not necessary to effect a transfer of the mortgage loans to
the indenture trustee, if the seller were to sell, assign, satisfy or discharge
any of those mortgage loans prior to recording the related assignment in favor
of the indenture trustee, the other parties to the sale, assignment,
satisfaction or discharge may have rights superior to those of the indenture
trustee. In some states, including Florida, Maryland and South Carolina, in the
absence of recordation of the assignments of the mortgages, the transfer to the
indenture trustee of the mortgage loans may not be effective against certain
creditors or purchasers from the seller or a trustee in bankruptcy thereof. If
those other parties, creditors or purchasers have rights to the mortgage loans
that are superior to those of the indenture trustee, securityholders could lose
the right to future payments of principal and interest to the extent that those
rights are not otherwise enforceable in favor of the indenture trustee under the
applicable mortgage documents.
The indenture trustee will not have physical possession of the
mortgages related to the mortgage loans in the trust. Instead, the seller, in
its capacity as servicer, will retain possession of the mortgages, and the
mortgages will not be stamped or otherwise marked to reflect the assignment to
the depositor, then to the owner trustee and then to the indenture trustee. If a
subsequent purchaser were able to take physical possession of the mortgages
without knowledge of those assignments, the interests of the indenture trustee
in the mortgages could be defeated. In that event, distributions to noteholders
may be adversely affected.
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MODIFICATION OF MORTGAGE LOANS
In accordance with the servicing agreement, the servicer may grant the
request of a mortgagor of a mortgage loan to either:
o change the interest rate payable on the related mortgage loan;
o increase the credit limit on the related mortgage loan above the
limit stated in the related credit line agreement;
o refinance the existing senior lien or place a new senior lien
related to a mortgage loan resulting in a CLTV Ratio above the
previous CLTV Ratio for that loan; or
o make any other material modification to the related mortgage loan.
provided, however, that without the consent of the enhancer, the aggregate
amount of mortgage loans so modified may not exceed 5% of the aggregate
principal balance of the mortgage loans as of the cut-off date.
SERVICING DEFAULT; RIGHTS UPON SERVICING DEFAULT
A servicing default under the servicing agreement generally will
include:
o any failure by the servicer to deposit to the Custodial Account,
Funding Account, Distribution Account or the Note Payment Account
any required payment which continues unremedied for three (3)
business days after the date upon which written notice of the
failure shall have been given to the servicer by the issuer or the
indenture trustee, or to the servicer, the issuer and the indenture
trustee by the enhancer;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
servicing agreement which continues unremedied for 60 days after
the date upon which written notice of the failure shall have been
given to the servicer by the issuer or the indenture trustee, or to
the servicer, the issuer and the indenture trustee by the enhancer;
o certain events of insolvency, bankruptcy, readjustment of debt,
marshalling of assets and liabilities or similar proceedings
regarding the servicer and certain actions by the servicer
indicating its insolvency or inability to pay its obligations; and
o certain other events relating to the servicer.
So long as a servicing default under the servicing agreement remains
unremedied, either the depositor, the enhancer, so long as it is not in default
of its payment obligations under the Policy, or, if the enhancer is in default
of its payment obligations under the Policy, the indenture trustee may, by
written notification to the servicer and to the issuer or the indenture trustee,
as applicable, terminate all of the rights and obligations of the servicer under
the servicing agreement, other than any right of the servicer as securityholder
and other than the right to receive servicing compensation and expenses for
servicing the mortgage loans during any period prior to the date of termination,
and reimbursement of other amounts the servicer is entitled to withdraw from the
Custodial Account, whereupon the indenture trustee, in accordance with the terms
of the servicing agreement, will succeed to all responsibilities, duties and
liabilities of the servicer under the servicing agreement, other than the
obligation to purchase mortgage loans under certain circumstances, and will be
entitled to similar compensation arrangements. In the event that the indenture
trustee would be obligated to succeed the servicer but is unwilling so to act,
it may appoint, or if it is unable so to act, it shall appoint, or petition a
court of competent jurisdiction for the appointment of an approved mortgage
servicing institution with a net worth of at least $10,000,000 to
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act as successor to the servicer under the servicing agreement; provided that
any successor servicer shall be acceptable to the enhancer, as evidenced by the
enhancer's prior consent; and provided further that the appointment of any
successor servicer will not result in the qualification, reduction or withdrawal
of the ratings assigned to the notes by the Rating Agencies, if determined
without regard to the Policy. Pending the appointment of a successor servicer,
the indenture trustee is obligated to act as servicer unless prohibited by law
from so acting. The indenture trustee and the successor servicer may agree upon
the servicing compensation to be paid, which compensation may not be greater
than the compensation paid to the initial servicer under the servicing
agreement.
EVIDENCE AS TO COMPLIANCE
The servicing agreement provides for delivery on or before a specified
date in each year, to the depositor, the enhancer, the paying agent and the
indenture trustee, of an annual statement signed by an officer of the servicer
to the effect that the servicer has fulfilled in all material respects the
minimum servicing standards set forth in the Uniform Single Attestation Program
for Mortgage Bankers throughout the preceding year or, if there has been a
material default in the fulfillment of any servicing obligation, the statement
shall specify each known default and the nature and status thereof. The
statement may be provided as a single form making the required statements as to
the servicing agreement along with other similar agreements.
The servicing agreement also provides that on or before a specified
date in each year, beginning on the first date that is at least a specified
number of months after the cut-off date, a firm of independent public
accountants will furnish a statement to the depositor, the enhancer, the paying
agent and the indenture trustee to the effect that, on the basis of an
examination by that firm conducted substantially in compliance with the
standards established by the American Institute of Certified Public Accountants,
the servicing of mortgage loans under the related agreements, including the
servicing agreement, was conducted substantially in compliance with the minimum
servicing standards set forth in the Uniform Single Attestation Program for
Mortgage Bankers, to the extent that procedures in the Uniform Single
Attestation Program for Mortgage Bankers are applicable to the servicing
obligations set forth in the related agreements, except for any significant
exceptions or errors in records that shall be reported in the statement.
Copies of the annual statement of an officer of the servicer may be
obtained by noteholders without charge upon written request to the servicer, at
the address indicated in the monthly statement to noteholders.
CERTAIN MATTERS REGARDING THE SERVICER
The servicing agreement provides that the servicer may not resign from
its obligations and duties under the servicing agreement except upon a
determination that performance of its obligations and duties is no longer
permissible under applicable law or except in connection with a permitted
transfer of servicing. No such resignation will become effective until the
indenture trustee or a successor servicer has assumed the servicer's obligations
and duties under the servicing agreement.
The servicing agreement also provides that, except as set forth below,
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the trust fund or the noteholders for
any action taken or for refraining from the taking of any action in good faith
pursuant to the servicing agreement, or for errors in judgment; provided,
however, that neither the servicer nor any such person will be protected against
any liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties or by reason of
reckless disregard of obligations and duties thereunder. The servicing agreement
further provides that the servicer and any director, officer, employee or agent
of the servicer is entitled to indemnification by the trust fund and will
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be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the servicing agreement, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. In addition, the
servicing agreement provides that the servicer will not be under any obligation
to appear in, prosecute or defend any legal or administrative action that is not
incidental to its respective duties under the servicing agreement and which in
its opinion may involve it in any expense or liability. The servicer may,
however, in its discretion undertake any action which it may deem necessary or
desirable with respect to the servicing agreement and the rights and duties of
the parties thereto and the interests of the noteholders thereunder. In that
event, the legal expenses and costs of the action and any liability resulting
from the action will be expenses, costs and liabilities of the trust fund and
the servicer will be entitled to be reimbursed out of funds otherwise payable to
noteholders.
Any person into which the servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the servicer is a
party or any person succeeding to the business of the servicer will be the
successor of the servicer under the servicing agreement, provided that resulting
entity meets the requirements set forth in the servicing agreement. In addition,
notwithstanding the prohibition on its resignation, the servicer may assign its
rights and delegate its duties and obligations under the servicing agreement to
any person satisfactory to the enhancer and meeting the requirements set forth
in the servicing agreement. In the case of any assignment, the servicer will be
released from its obligations under the servicing agreement, exclusive of
liabilities and obligations incurred by it prior to the time of the assignment.
AMENDMENT
The servicing agreement may be amended by the parties thereto, provided
that any amendment be accompanied by a letter from each Rating Agency that the
amendment will not result in the qualification, reduction or withdrawal of the
rating then assigned to the notes, if determined without regard to the Policy,
and provided further, that the consent of the enhancer, the paying agent and the
indenture trustee shall be obtained.
THE TRUST AGREEMENT AND THE INDENTURE
The following summary describes certain terms of the trust agreement
and the indenture. This summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the trust agreement and the indenture. See "Description of the Agreements" in
the prospectus.
THE TRUST FUND
Simultaneously with the issuance of the notes, the issuer will pledge
the trust fund to the indenture trustee as collateral for the notes. As pledgee
of the mortgage loans, the indenture trustee will be entitled to direct the
issuer in the exercise of all rights and remedies of the trust fund against the
seller under the purchase agreement and against the servicer under the servicing
agreement.
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REPORTS TO NOTEHOLDERS
The servicer will prepare and furnish to the indenture trustee and the
paying agent pursuant to the terms of the servicing agreement, and the indenture
trustee or the paying agent will make available to each holder of the notes and
each Rating Agency, the enhancer and the depositor, a report setting forth
certain amounts relating to the notes for each payment date, including, among
other things:
(1) the amount of principal, if any, payable on that payment date to
the holders of the notes;
(2) the amount of interest payable on that payment date to the holders
of the notes and the amount, if any, of Interest Shortfalls;
(3) the Note Balance after giving effect to any payment of principal
on that payment date;
(4) with respect to each loan group, the Principal Collections and
Interest Collections for the related Collection Period;
(5) with respect to each loan group, the aggregate principal balance
of the mortgage loans as of the end of the preceding Collection
Period;
(6) with respect to each loan group, the balance of the related
Funding Account as of the end of the preceding Collection Period;
(7) with respect to each loan group, the aggregate principal balance
of all subsequent mortgage loans transferred pursuant to a
subsequent transfer agreement since the closing date;
(8) with respect to each loan group, the related Overcollateralization
Amount as of the end of the preceding Collection Period;
(9) the monthly CPR and draw rate for that payment date; and
(10) the amounts paid, if any, under the Policy and the Yield
Maintenance Agreements for that payment date.
In the case of information furnished pursuant to clauses (1) and (2) above, the
amounts will be expressed as a dollar amount per $25,000 in face amount of
notes.
The paying agent will make the reports to holders of the notes, and, at
its option, any additional files containing the same information in an
alternative format, available each month to holders of the notes, and other
parties to the indenture via the paying agent's internet website. The paying
agent's internet website shall initially be located at www.firstlinkabs.com.
Assistance in using the website can be obtained by calling the paying agent's
customer service desk at 800-665-9359. The paying agent shall have the right to
change the way the reports to holders of the notes are distributed in order to
make the distribution more convenient and/or more accessible and the paying
agent shall provide timely and adequate notification to all above parties
regarding any changes.
CERTAIN COVENANTS
The indenture will provide that the issuer may not consolidate or merge
with or into any other entity, unless:
(1) the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
(2) the surviving entity expressly assumes, by an indenture
supplemental to the indenture, the issuer's obligation to make due
and punctual payments upon the notes and the performance or
observance of any agreement and covenant of the issuer under the
indenture;
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(3) no event of default under the indenture shall have occurred and be
continuing immediately after the merger or consolidation;
(4) the issuer has received consent of the enhancer and has been
advised that the ratings of the notes, without regard to the
Policy, then in effect would not be reduced or withdrawn by any
Rating Agency as a result of the merger or consolidation;
(5) any action that is necessary to maintain the lien and security
interest created by the indenture has been taken;
(6) the issuer has received an opinion of counsel to the effect that
the consolidation or merger would have no material adverse tax
consequence to the issuer or to any noteholder or
certificateholder; and
(7) the issuer has delivered to the indenture trustee an officer's
certificate and an opinion of counsel each stating that the
consolidation or merger and the supplemental indenture comply with
the indenture and that all conditions precedent, as provided in
the indenture, relating to the transaction have been complied
with.
The issuer will not, among other things:
(1) except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the issuer;
(2) claim any credit on or make any deduction from the principal and
interest payable in respect of the notes, other than amounts
withheld under the Internal Revenue Code of 1986, as amended, or
applicable state law, or assert any claim against any present or
former holder of notes because of the payment of taxes levied or
assessed upon the issuer;
(3) permit the validity or effectiveness of the indenture to be
impaired or permit any person to be released from any covenants or
obligations with respect to the notes under the indenture except
as may be expressly permitted thereby; or
(4) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the issuer or any
part thereof, or any interest therein or the proceeds thereof.
The issuer may not engage in any activity other than as specified under
"The Issuer" in this prospectus supplement.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
An event of default under the indenture includes:
(1) a default for five (5) days or more in the payment of any
principal of or interest on any note;
(2) there occurs a default in the observance or performance in any
material respect of any covenant or agreement of the issuer made
in the indenture, or any representation or warranty of the issuer
made in the indenture or in any certificate delivered pursuant to
or in connection with the indenture proving to have been incorrect
in any material respect as of the time when the same shall have
been made that has a material adverse effect on the noteholders or
the enhancer, and the default shall continue or not be cured, or
the circumstance or condition in respect of which the
representation or warranty was incorrect shall not have been
eliminated or otherwise cured, for a period of 30 days after there
shall have been given, by registered or certified mail, to the
issuer by the indenture trustee or to the issuer and the indenture
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trustee by the holders of at least 25% of the outstanding Note
Balance of the notes or the enhancer, a written notice specifying
the default or incorrect representation or warranty and requiring
it to be remedied and stating that the notice is a notice of
default under the indenture;
(3) there occurs the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the issuer or
any substantial part of the trust fund in an involuntary case
under any applicable federal or state bankruptcy, insolvency or
other similar law now or hereafter in effect, or appointing a
receiver, liquidator, assignee, servicer, trustee, sequestrator or
similar official of the issuer or for any substantial part of the
trust fund, or ordering the winding-up or liquidation of the
issuer's affairs, and the decree or order shall remain unstayed
and in effect for a period of 60 consecutive days; or
(4) there occurs the commencement by the issuer of a voluntary case
under any applicable federal or state bankruptcy, insolvency or
other similar law now or hereafter in effect, or the consent by
the issuer to the entry of an order for relief in an involuntary
case under any such law, or the consent by the issuer to the
appointment or taking possession by a receiver, liquidator,
assignee, servicer, trustee, sequestrator or similar official of
the issuer or for any substantial part of the assets of the trust
fund, or the making by the issuer of any general assignment for
the benefit of creditors, or the failure by the issuer generally
to pay its debts as those debts become due, or the taking of any
action by the issuer in furtherance of any of the foregoing.
If an event of default with respect to the notes at the time
outstanding occurs and is continuing, the indenture trustee, acting on the
direction of the enhancer, if the enhancer is not then in default under the
Policy, or the holders of notes representing a majority of the Note Balance, if
the enhancer is in default under the Policy, may declare all notes to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the enhancer or the holders of notes representing a
majority of the Note Balance, with the consent of the enhancer.
If, following an event of default with respect to the notes, the notes
have been declared to be due and payable, the indenture trustee, acting on the
direction of the enhancer, if the enhancer is not then in default under the
Policy, or on the direction of at least 51% of the noteholders, if the enhancer
is in default under the Policy, notwithstanding any acceleration, may elect to
maintain possession of the collateral securing the notes and to continue to
apply payments on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes as they would have become due
if there had not been a declaration.
In addition, the indenture trustee may not sell or otherwise liquidate
the collateral securing the notes following an event of default, unless:
o the enhancer, if the enhancer is not then in default under the
Policy, or all noteholders, if the enhancer is in default under
the Policy, consent to the sale;
o the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes and to reimburse the enhancer at the date of the
sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes
as payments would have become due if the notes had not been
declared due and payable, and the indenture trustee obtains the
consent of the holders of notes representing 66 2/3% of the then
Note Balance and the enhancer.
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In the event that the indenture trustee liquidates the collateral in
connection with an event of default, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of an event of default, the
amount available for payments to the noteholders would be less than would
otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the noteholders after the occurrence of an event of default.
In the event the principal of the notes is declared due and payable as
described above, the holders of any notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of the related note less the amount of the discount that is unamortized.
No noteholder generally will have any right under the indenture to
institute any proceeding with respect to the indenture unless:
(1) the holder previously has given to the indenture trustee written
notice of default and the continuance thereof;
(2) the holders of any note evidencing not less than 25% of the
aggregate percentage interests constituting that note:
o have made written request upon the indenture trustee to
institute the proceeding in its own name thereunder; and
o have offered to the indenture trustee reasonable indemnity;
(3) the indenture trustee has neglected or refused to institute any
proceeding for 60 days after receipt of the request and indemnity;
(4) the enhancer has given its consent to the proposed proceedings;
and
(5) no direction inconsistent with the written request has been given
to the indenture trustee during the 60 day period by the holders
of a majority of the outstanding principal balances of that note,
except as otherwise provided for in the related agreement with
respect to the enhancer.
However, the indenture trustee will be under no obligation to exercise any of
the trusts or powers vested in it by the indenture or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of the notes or the enhancer, unless the
noteholders or the enhancer have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT AND MODIFICATION OF TRUST AGREEMENT AND INDENTURE
The trust agreement may be amended from time to time by the parties
thereto, with the consent of the enhancer, provided that any amendment be
accompanied by an opinion of counsel addressed to the owner trustee, the paying
agent, the indenture trustee and the enhancer to the effect that the amendment:
o complies with the provisions of the trust agreement; and
o will not cause the trust fund to be subject to an entity level
tax.
With the consent of the holders of a majority of the outstanding notes
and the enhancer, the issuer, the paying agent and the indenture trustee may
execute a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the indenture, or modify, except as provided
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below, in any manner the rights of the noteholders. However, without the consent
of the holder of each outstanding note affected thereby and the enhancer, no
supplemental indenture will:
(1) change the due date of any installment of principal of or interest
on any note or reduce the principal amount thereof, the interest
rate specified thereon or change any place of payment where or the
coin or currency in which any note or any interest thereon is
payable;
(2) impair the right to institute suit for the enforcement of certain
provisions of the indenture regarding payment;
(3) reduce the percentage of the Note Balance of the outstanding
notes, the consent of the holders of which is required for any
supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with certain provisions of
the indenture or of certain defaults thereunder and their
consequences as provided for in the indenture;
(4) modify or alter the provisions of the indenture regarding the
voting of notes held by the issuer, the depositor or an affiliate
of any of them;
(5) decrease the percentage of the Note Balance required to amend the
sections of the indenture which specify the applicable percentage
of the Note Balance necessary to amend the indenture or certain
other related agreements;
(6) modify any of the provisions of the indenture in a manner as to
affect the calculation of the amount of any payment of interest or
principal due on any note, including the calculation of any of the
individual components of such calculation; or
(7) permit the creation of any lien ranking prior to or, except as
otherwise contemplated by the indenture, on a parity with the lien
of the indenture with respect to any of the collateral for the
notes or, except as otherwise permitted or contemplated in the
indenture, terminate the lien of the indenture on any collateral
or deprive the holder of any note of the security afforded by the
lien of the indenture.
The issuer, the indenture trustee and the paying agent may also enter
into supplemental indentures, with the consent of the enhancer and without
obtaining the consent of the noteholders, for the purpose of, among other
things, curing any ambiguity or correcting or supplementing any provision in the
indenture that may be inconsistent with any other provision in the indenture.
TERMINATION; REDEMPTION OF NOTES
The obligations created by the trust agreement, other than certain
limited payment and notice obligations of the owner trustee and the depositor,
respectively, will terminate upon the payment to the related securityholders,
including the notes issued pursuant to the indenture, of all amounts held by the
servicer and required to be paid to the securityholders and the payment of all
amounts due and owing the enhancer under the insurance agreement following the
earliest of:
o the final distribution of all moneys or other property or proceeds
of the trust fund in accordance with the terms of the indenture
and the trust agreement;
o the Final Payment Date; or
o the purchase by the servicer of all mortgage loans pursuant to the
servicing agreement. See "Description of the Securities--Maturity
and Optional Redemption" in this prospectus supplement.
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The indenture will be discharged, except with respect to certain
continuing rights specified in the indenture, upon the distribution to
noteholders of all amounts required to be distributed pursuant to the indenture
including, for as long as the notes are outstanding, all amounts payable under
the Policy.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE, THE PAYING AGENT AND THE ISSUER
Neither the indenture trustee, the paying agent, nor any director,
officer or employee of the indenture trustee will be under any liability to the
issuer or the noteholders for any action taken or for refraining from the taking
of any action in good faith pursuant to the indenture or for errors in judgment;
provided, however, that none of the indenture trustee, the paying agent and any
director, officer or employee of the indenture trustee or the paying agent will
be protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties under the indenture.
Subject to certain limitations set forth in the indenture, the indenture
trustee, the paying agent and any director, officer, employee or agent of the
indenture trustee or the paying agent will be indemnified by the issuer and held
harmless against any loss, liability or expense incurred in connection with
investigating, preparing to defend or defending any legal action, commenced or
threatened, relating to the indenture other than any loss, liability or expense
incurred by reason of willful malfeasance, bad faith or negligence in the
performance of its duties under the indenture or by reason of reckless disregard
of its obligations and duties under the indenture. All persons into which the
indenture trustee or the paying agent may be merged or with which it may be
consolidated or any person resulting from any merger or consolidation will be
the successor of the indenture trustee or the paying agent, as applicable, under
the indenture.
USE OF PROCEEDS
The proceeds from the sale of the notes will be used, together with the
transfer of the certificates, to purchase the initial mortgage loans from the
depositor. However, the depositor will not receive any proceeds from any sale of
the notes in market-making transactions by Wachovia Securities, LLC, an
affiliate of the depositor. See "Underwriting" in this prospectus supplement.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the notes
offered under this prospectus supplement and the accompanying prospectus. This
discussion has been prepared with the advice of Orrick, Herrington & Sutcliffe
LLP as counsel to the depositor.
This discussion is directed solely to noteholders that hold the notes
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended, and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules, including banks, insurance companies,
foreign investors, tax-exempt organizations, dealers in securities or
currencies, mutual funds, real estate investment trusts, natural persons, cash
method taxpayers, S corporations, estates and trusts, investors that hold the
notes as part of a hedge, straddle or, an integrated or conversion transaction,
or holders whose "functional currency" is not the United States dollar. Also, it
does not address alternative minimum tax consequences or the indirect effects on
the holders of equity interests in a noteholder. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers and preparers of tax returns should be aware that under applicable
Treasury regulations a provider of advice on specific issues of law is not
considered an income tax return preparer unless the advice:
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o is given as to events that have occurred at the time the advice is
rendered and is not given as to the consequences of contemplated
actions; and
o is directly relevant to the determination of an entry on a tax
return.
Accordingly, taxpayers should consult their tax advisors and tax return
preparers regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed in this prospectus supplement
and/or the accompanying prospectus.
In addition to the federal income tax consequences described in this
prospectus supplement and the accompanying prospectus, potential investors
should consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the notes. See "State and Other Tax Consequences"
in this prospectus supplement. Noteholders are advised to consult their tax
advisors concerning the federal, state, local or other tax consequences to them
of the purchase, ownership and disposition of the notes offered under this
prospectus.
The notes will be characterized as indebtedness, and neither the issuer
nor any portion of the issuer will be characterized as an association, or a
publicly traded partnership, taxable as a corporation or as a taxable mortgage
pool within the meaning of Section 7701(i) of the Internal Revenue Code of 1986,
as amended.
The following discussion is based in part upon the rules governing
original issue discount that are described in Sections 1271-1273 and 1275 of the
Internal Revenue Code of 1986, as amended, and in the Treasury regulations
issued under these sections, referred to as the "OID Regulations." The OID
Regulations do not adequately address various issues relevant to, and in some
instances provide that they are not applicable to, securities such as the notes.
For purposes of this tax discussion, references to a "noteholder" or a "holder"
are to the beneficial owner of a note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Internal Revenue Code of 1986, as
amended; and notes held by a real estate investment trust will not constitute
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Internal
Revenue Code of 1986, as amended, and interest on notes will not be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Internal Revenue Code of 1986, as
amended.
ORIGINAL ISSUE DISCOUNT
The notes are expected to be treated as issued with original issue
discount. The original issue discount on a note will be the excess of its stated
redemption price at maturity over its issue price. The issue price of the notes
will be the first cash price at which a substantial amount of the notes are
sold, excluding sales to bond houses, brokers and underwriters, on the closing
date. If less than a substantial amount of the notes is sold for cash on or
prior to the closing date, the issue price the notes will be treated as the fair
market value of the notes on the closing date. Under the OID Regulations, the
stated redemption price of a note is equal to the total of all payments to be
made on the note other than "qualified stated interest." "Qualified stated
interest" includes interest that is unconditionally payable at least annually at
a single fixed rate, or in the case of a variable rate debt instrument, at a
"qualified floating rate" an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that typically
does not operate in a manner that accelerates or defers interest payments on the
note. Interest on the notes is not expected to be treated as qualified stated
interest because interest accrued at a rate in excess of the rate described in
clause (2) of the definition of the Note Rate of the notes (limiting the rate to
the
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weighted average net loan rate or that rate minus 0.50%) could in high interest
rate periods cause the payment of interest to be deferred for a period exceeding
one year.
In the case of notes bearing adjustable note rates, the determination
of the total amount of original issue discount and the timing of the inclusion
of original issue discount will vary according to the characteristics of the
notes. In general terms original issue discount is accrued by treating the note
rate of the notes as fixed and making adjustments to reflect actual note rate
payments.
If the accrued interest to be paid on the first payment date is
computed for a period that begins prior to the closing date, a portion of the
purchase price paid for a note will reflect the accrued interest. In those
cases, information returns to the noteholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
during periods prior to the closing date is treated as part of the overall
purchase price of the note, and not as a separate asset the purchase price of
which is recovered entirely out of interest received on the next distribution
date, and that portion of the interest paid on the first distribution date in
excess of interest accrued for a number of days corresponding to the number of
days from the closing date to the first distribution date should be included in
the stated redemption price of the note. However, the OID Regulations state that
all or some portion of the accrued interest may be treated as a separate asset
the cost of which is recovered entirely out of interest paid on the first
distribution date. It is unclear how an election to do so would be made under
the OID Regulations and whether the election could be made unilaterally by a
noteholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a note will be considered to be de minimis if it is
less than 0.25% of the stated redemption price of the note multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the note is computed as the sum of the amounts determined, as to each payment
included in the stated redemption price of the note, by multiplying (1) the
number of complete years, rounding down for partial years, from the issue date
until the payment is expected to be made, possibly taking into account a
prepayment assumption, by (2) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of the note. Under the OID Regulations, original issue discount of only
a de minimis amount, other than de minimis original issue discount attributable
to a so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of the total amount of the de minimis original issue discount and a
fraction, the numerator of which is the amount of the principal payment and the
denominator of which is the outstanding stated principal amount of the note. The
OID Regulations also would permit a noteholder to elect to accrue de minimis
original issue discount into income currently based on a constant yield method.
See "Material Federal Income Tax Considerations--Market Discount" in this
prospectus supplement for a description of the election under the OID
Regulations.
If original issue discount on a note is in excess of a de minimis
amount, the holder of the note must include in ordinary gross income the sum of
the "daily portions" of original issue discount for each day during its taxable
year on which it held the note, including the purchase date but excluding the
disposition date. In the case of an original holder of a note, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, each period that ends on a date
that corresponds to a distribution date and begins on the first day following
the immediately preceding accrual period, or in the case of the first period,
begins on the closing date, a calculation will be made of the portion of the
original issue discount that accrued during this accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (1) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the note, if
any, in future periods and (B) the distributions made on the note during the
accrual period of amounts included in the stated redemption price, over (2) the
adjusted issue price of the note at the beginning of the accrual period. The
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present value of the remaining distributions referred to in the preceding
sentence will be calculated using a discount rate equal to the original yield to
maturity of the notes, and possibly assuming that distributions on the note will
be received in future periods based on the trust assets being prepaid at a rate
equal to a prepayment assumption. For these purposes, the original yield to
maturity of the note would be calculated based on its issue price and possibly
assuming that distributions on the note will be made in all accrual periods
based on the trust assets being prepaid at a rate equal to a prepayment
assumption. The adjusted issue price of a note at the beginning of any accrual
period will equal the issue price of the note, increased by the aggregate amount
of original issue discount that accrued on the note in prior accrual periods,
and reduced by the amount of any distributions made on the note in prior accrual
periods of amounts included in its stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for that day. Although the issuer will
calculate original issue discount, if any, based on its determination of the
accrual periods, a noteholder may, subject to some restrictions, elect other
accrual periods.
A subsequent purchaser of a note that purchases the note at a price,
excluding any portion of the price attributable to accrued qualified stated
interest, less than its remaining stated redemption price will also be required
to include in gross income the daily portions of any original issue discount
relating to the note. However, each daily portion will be reduced, if the cost
is in excess of its "adjusted issue price," in proportion to the ratio that
excess bears to the aggregate original issue discount remaining to be accrued on
the note. The adjusted issue price of a note on any given day equals:
o the adjusted issue price, or, in the case of the first accrual
period, the issue price, of the note at the beginning of the
accrual period which includes that day, PLUS
o the daily portions of original issue discount for all days during
the accrual period prior to that day, LESS
o any principal payments made during the accrual period relating to
the note.
MARKET DISCOUNT
A noteholder that purchases a note at a market discount, that is,
assuming the note is issued without original issue discount, at a purchase price
less than its remaining stated principal amount, will recognize gain upon
receipt of each distribution representing stated principal. In particular, under
Section 1276 of the Internal Revenue Code of 1986, as amended, the noteholder,
in most cases, will be required to allocate the portion of each distribution
representing stated principal first to accrued market discount not previously
included in income, and to recognize ordinary income to that extent.
A noteholder may elect to include market discount in income currently
as it accrues rather than including it on a deferred basis in accordance with
the foregoing. If made, the election will apply to all market discount bonds
acquired by the noteholder on or after the first day of the first taxable year
to which the election applies. In addition, the OID Regulations permit a
noteholder to elect to accrue all interest, discount, including de minimis
market or original issue discount, and premium in income as interest, based on a
constant yield method. If this election were made for a note with market
discount, the noteholder would be deemed to have made an election to include
currently market discount in income for all other debt instruments having market
discount that the noteholder acquires during the taxable year of the election or
after that year, and possibly previously acquired instruments. Similarly, a
noteholder that made this election for a note that is acquired at a premium
would be deemed to have made an election to amortize bond premium for all debt
instruments having amortizable bond premium that the noteholder owns or
acquires. See "Material Federal Income Tax Considerations--Premium" in this
prospectus supplement. Each of these elections to accrue interest, discount and
premium for a note on a constant yield method would be irrevocable.
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However, market discount for a note will be considered to be de minimis
for purposes of Section 1276 of the Internal Revenue Code of 1986, as amended,
if the market discount is less than 0.25% of the remaining principal amount of
the note multiplied by the number of complete years to maturity remaining after
the date of its purchase. In interpreting a similar rule for original issue
discount on obligations payable in installments, the OID Regulations refer to
the weighted average maturity of obligations, and it is likely that the same
rule will be applied for market discount, possibly taking into account a
prepayment assumption. If market discount is treated as de minimis under this
rule, it appears that the actual discount would be treated in a manner similar
to original issue discount of a de minimis amount. See "Material Federal Income
Tax Considerations--Original Issue Discount" in this prospectus supplement.
Section 1276(b)(3) of the Internal Revenue Code of 1986, as amended,
specifically authorizes the Treasury Department to issue regulations providing
for the method for accruing market discount on debt instruments, the principal
of which is payable in more than one installment. Until regulations are issued
by the Treasury Department, some rules described in the legislative history to
Section 1276 of the Internal Revenue Code of 1986, as amended, or the Committee
Report, apply. The Committee Report indicates that in each accrual period market
discount on notes should accrue, at the noteholder's option: (1) on the basis of
a constant yield method, or (2) in the case of a note issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the notes as of the
beginning of the accrual period. Moreover, any prepayment assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect these
regulations might have on the tax treatment of a note purchased at a discount in
the secondary market. Further, it is uncertain whether a prepayment assumption
would be required to be used for the notes if they were issued with original
issue discount.
To the extent that notes provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which the discount would accrue if it were original
issue discount. Moreover, in any event a holder of a note typically will be
required to treat a portion of any gain on the sale or exchange of the note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income.
Further, under Section 1277 of the Internal Revenue Code of 1986, as
amended, a holder of a note may be required to defer a portion of its interest
deductions for the taxable year attributable to any indebtedness incurred or
continued to purchase or carry a note purchased with market discount. For these
purposes, the de minimis rule referred to in the third preceding paragraph
applies. Any deferred interest expense would not exceed the market discount that
accrues during that taxable year and is, in most cases, allowed as a deduction
not later than the year in which the market discount is includible in income. If
the holder elects to include market discount in income currently as it accrues
on all market discount instruments acquired by that holder in that taxable year
or after that year, the interest deferral rule described above will not apply.
PREMIUM
If a holder purchases a note for an amount greater than its remaining
principal amount, the holder will be considered to have purchased the note with
amortizable bond premium equal in amount to the excess, and may elect to
amortize the premium using a constant yield method over the remaining term of
the note and to offset interest otherwise to be required to be included in
income relating to that note by the premium amortized in that taxable year. If
this election is made, it will apply to all debt instruments
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having amortizable bond premium that the holder owns or subsequently acquires.
The OID Regulations also permit noteholders to elect to include all interest,
discount and premium in income based on a constant yield method. See "Material
Federal Income Tax Considerations--Market Discount" in this prospectus
supplement. The Committee Report states that the same rules that apply to
accrual of market discount, which rules may require use of a prepayment
assumption in accruing market discount for notes without regard to whether the
notes have original issue discount, would also apply in amortizing bond premium
under Section 171 of the Internal Revenue Code of 1986, as amended. The use of
an assumption that there will be no prepayments may be required.
REALIZED LOSSES
Under Section 166 of the Internal Revenue Code of 1986, as amended,
both corporate and noncorporate holders of the notes that acquire those notes in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their notes become
wholly or partially worthless as the result of one or more realized losses on
the trust assets. However, it appears that a noncorporate holder that does not
acquire a note in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Internal Revenue Code of 1986, as
amended, until the holder's note becomes wholly worthless, that is, until its
outstanding principal balance has been reduced to zero, and that the loss will
be characterized as a short-term capital loss.
Each holder of a note will be required to accrue interest and original
issue discount for that note, without giving effect to any reductions in
distributions attributable to defaults or delinquencies on the trust assets
until it can be established that any reduction ultimately will not be
recoverable. As a result, the amount of taxable income reported in any period by
the holder of a note could exceed the amount of economic income actually
realized by the holder in that period. Although the holder of a note eventually
will recognize a loss or reduction in income attributable to previously accrued
and included income that, as the result of a realized loss, ultimately will not
be realized, the law is unclear as to the timing and character of the loss or
reduction in income.
SALES OF NOTES
If a note is sold, the selling noteholder will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the note. The adjusted basis of a note, in most cases, will equal the
cost of that note to that noteholder, increased by the amount of any original
issue discount or market discount previously reported by the noteholder for that
note and reduced by any amortized premium and any principal payment received by
the noteholder. Except as provided in the following three paragraphs, any gain
or loss will be capital gain or loss, provided the note is held as a capital
asset, in most cases, property held for investment, within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended.
Gain recognized on the sale of a note by a seller who purchased the
note at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of the discount that accrued during the period the note
was held by the holder, reduced by any market discount included in income under
the rules described in this prospectus supplement under "Material Federal Income
Tax Considerations--Market Discount" and "--Premium."
A portion of any gain from the sale of a note that might otherwise be
capital gain may be treated as ordinary income to the extent that the note is
held as part of a "conversion transaction" within the meaning of Section 1258 of
the Internal Revenue Code of 1986, as amended. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in the transaction. The amount of gain so realized in a
conversion
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transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate," which rate is computed and
published monthly by the IRS, at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include any
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
BACKUP WITHHOLDING
Payments of interest and principal, as well as payments of proceeds
from the sale of notes, may be subject to the "backup withholding tax" under
Section 3406 of the Internal Revenue Code of 1986, as amended, if recipients of
the payments fail to furnish to the payor information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from the
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against the recipient's federal income tax. Furthermore,
penalties may be imposed by the IRS on a recipient of payments that is required
to supply information but that does not do so in the proper manner.
The issuer will report to the holders and to the IRS for each calendar
year the amount of any "reportable payments" during that year and the amount of
tax withheld, if any, relating to payments on the notes.
TAX TREATMENT OF FOREIGN INVESTORS
Interest paid on a note to a nonresident alien individual, foreign
partnership or foreign corporation that has no connection with the United States
other than holding notes, known as nonresidents, will normally qualify as
portfolio interest and will be exempt from federal income tax, except, in
general, where (1) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (2) the recipient
is a controlled foreign corporation to which the issuer is a related person.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from the interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate, unless this
rate were reduced or eliminated by an applicable tax treaty, on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to nonresidents. For these purposes a noteholder may be considered to be related
to the issuer by holding a certificate or by having common ownership with any
other holder of a certificate or any affiliate of that holder.
NEW WITHHOLDING REGULATIONS
The Treasury Department has issued new regulations referred to as the
"New Withholding Regulations," which revise procedures for complying with or
obtaining exemptions under to the withholding, backup withholding and
information reporting rules described above in the three preceding paragraphs.
Special rules are applicable to partnerships, estates and trusts and, in certain
circumstances, certifications as to foreign status and other matters may be
required from partners or beneficiaries thereof The New Withholding Regulations
are generally effective for payments made after December 31, 2000, subject to
transition rules. Prospective investors are urged to consult their tax advisors
regarding the procedure for obtaining an exemption from withholding under the
New Withholding Regulations.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the notes offered by this prospectus supplement and the
accompanying prospectus. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their tax advisors about the
various tax consequences of investments in the notes offered by this prospectus.
ERISA CONSIDERATIONS
The notes are eligible for purchase by any Plan. Any fiduciary or other
investor of Plan assets that proposes to acquire or hold the notes on behalf of
or with assets of any Plan should consult with its counsel with respect to the
potential applicability of the fiduciary responsibility provisions of ERISA and
the prohibited transaction provisions of ERISA and Section 4975 of the Internal
Revenue Code of 1986, as amended, to the proposed investment. See "ERISA
Considerations" in the prospectus.
Each purchaser of a note, by its acceptance of the note, shall be
deemed to have represented that the acquisition and holding of the note by the
purchaser does not constitute or give rise to a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Internal Revenue Code of 1986, as
amended, for which no statutory, regulatory or administrative exemption is
available. See "ERISA Considerations" in the prospectus.
The notes may not be purchased with the assets of a Plan if the
underwriters, the depositor, the servicer, the indenture trustee, the owner
trustee, the paying agent, the enhancer or any of their affiliates:
o has investment or administrative discretion with respect to the
Plan assets;
o has authority or responsibility to give, or regularly gives,
investment advice regarding the Plan assets, for a fee and under
an agreement or understanding that the advice will serve as a
primary basis for investment decisions regarding the Plan assets
and will be based on the particular investment needs for the Plan;
or
o unless United States Department of Labor ("DOL") Prohibited
Transaction Class Exemption 90-1, 91-38 or 95-60 applies, is an
employer maintaining or contributing to the Plan.
On January 5, 2000, the DOL published final regulations under Section
401(c) of ERISA. The final 401(c) Regulations took effect on July 5, 2001.
The sale of any of the notes to a Plan is in no respect a
representation by the issuer or the underwriters that the investment meets all
relevant legal requirements with respect to investments by Plans generally or
any particular Plan, or that the investment is appropriate for Plans generally
or any particular Plan.
LEGAL INVESTMENT
The notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
Accordingly, many institutions with legal authority to invest in
mortgage-related securities may not be legally authorized to invest in the
notes. No representation is made in this prospectus supplement as to whether the
notes constitute legal investments
S-115
for any entity under any applicable statute, law, rule, regulation or order.
Prospective purchasers are urged to consult with their counsel concerning the
status of the notes as legal investments for such purchasers prior to investing
in the notes. See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each underwriter has agreed to purchase, and the depositor has agreed
to sell to each underwriter, the principal amount of notes opposite its name in
the table below:
PRINCIPAL AMOUNT OF NOTES
WACHOVIA SECURITIES, MERRILL LYNCH, PIERCE, FENNER &
LLC SMITH INCORPORATED UBS SECURITIES LLC
-------------------- ------------------------------- ------------------
Class A-I-1 notes...... $320,000,000 $40,000,000 $40,000,000
Class A-II-1 notes..... $600,000,000 $75,000,000 $75,000,000
Class A-II-2 notes..... $100,000,000 $0 $0
The distribution of the notes by the underwriters may be effected from
time to time in one or more negotiated transactions or otherwise, at varying
prices to be determined at the time of sale. Proceeds to the depositor from the
sale of the notes, before deducting expenses payable by the depositor, will be
approximately 99.78% of the aggregate Note Balance as of the closing date.
The depositor has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters intend to make a secondary market in the notes, but
have no obligation to do so. There can be no assurance that a secondary market
for the notes will develop, or if it does develop, that it will provide holders
of the notes with liquidity of investment at any particular time or for the life
of the notes. The notes will not be listed on any securities exchange.
Upon receipt of a request by an investor who has received an electronic
prospectus supplement and prospectus from any underwriter or a request by that
investor's representative within the period during which there is an obligation
to deliver a prospectus supplement and prospectus, the depositor or the
applicable underwriter will promptly deliver, or cause to be delivered, without
charge, a paper copy of the prospectus supplement and prospectus.
Until 90 days from the date of this prospectus supplement, all dealers
effecting transactions in the notes, whether or not participating in this
distribution, may be required to deliver a prospectus supplement and prospectus.
This is in addition to the obligation of dealers to deliver a prospectus
supplement and prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
This prospectus supplement and the accompanying prospectus may be used
by Wachovia Securities, LLC, an affiliate of the depositor, in connection with
offers and sales related to market-making transactions in the notes. In these
market-making transactions, Wachovia Securities, LLC may act as a principal or
an agent. The sales will be at negotiated prices determined at the time of sale.
S-116
On or about July 1, 2003, Wachovia Securities, LLC will transfer its
corporate and investment banking division (including all assets and liabilities
related to the business of the division) to a new wholly-owned registered
broker-dealer subsidiary of Wachovia Corporation, Wachovia Capital Markets, LLC.
Wachovia Capital Markets, LLC, will be a member of the NASD, NYSE, and SIPC.
After that transfer, Wachovia Capital Markets, LLC will act as underwriter under
the Underwriting Agreement.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon for
the depositor and the underwriters by Orrick, Herrington & Sutcliffe LLP, New
York, New York.
RATINGS
It is a condition to issuance of the notes that they be rated "Aaa" by
Moody's Investors Service, Inc., or Moody's, and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc., or Standard &
Poor's. The depositor has not requested a rating on the notes by any rating
agency other than Moody's and Standard & Poor's. However, there can be no
assurance as to whether any other rating agency will rate the notes or, if it
does, what rating would be assigned by any other rating agency. Any rating on
the notes by another rating agency could be lower than the ratings assigned to
the notes by Moody's and Standard & Poor's. A securities rating addresses the
likelihood of the receipt by the holders of the notes of distributions on the
mortgage loans. The rating takes into consideration the structural and legal
aspects associated with the certificates and the notes, but does not address
Interest Shortfalls or the likelihood that payments will be made by the provider
of the Yield Maintenance Agreements. The ratings on the notes do not constitute
statements regarding the possibility that the holders of the notes might realize
a lower than anticipated yield. A securities rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at any
time by the assigning rating organization. Each securities rating should be
evaluated independently of similar ratings on different securities.
EXPERTS
The financial statements of Financial Guaranty Insurance Company as of
December 31, 2002 and 2001 and for each of the years in the three-year period
ended December 31, 2002 are included in the Form 8-K of the registrant, which is
incorporated by reference in the registration statement in reliance upon the
report of KPMG LLP, independent certified public accountants which is also
incorporated by reference therein and upon the authority of said firm as experts
in accounting and auditing.
S-117
CLASS A-I-1 NOTES
SCHEDULE I-A-1
PAYMENT SCHEDULED PAYMENT SCHEDULED
DATE NOTIONAL BALANCE DATE NOTIONAL BALANCE
---- ---------------- ---- ----------------
July 2003 400,000,000.00 February 2006 400,000,000.00
August 2003 400,000,000.00 March 2006 400,000,000.00
September 2003 400,000,000.00 April 2006 400,000,000.00
October 2003 400,000,000.00 May 2006 400,000,000.00
November 2003 400,000,000.00 June 2006 400,000,000.00
December 2003 400,000,000.00 July 2006 400,000,000.00
January 2004 400,000,000.00 August 2006 385,623,745.06
February 2004 400,000,000.00 September 2006 371,171,786.86
March 2004 400,000,000.00 October 2006 356,643,726.78
April 2004 400,000,000.00 November 2006 342,039,164.07
May 2004 400,000,000.00 December 2006 327,357,695.87
June 2004 400,000,000.00 January 2007 312,598,917.22
July 2004 400,000,000.00 February 2007 297,762,421.01
August 2004 400,000,000.00 March 2007 282,847,797.99
September 2004 400,000,000.00 April 2007 267,854,636.75
October 2004 400,000,000.00 May 2007 252,782,523.72
November 2004 400,000,000.00 June 2007 237,631,043.16
December 2004 400,000,000.00 July 2007 222,399,777.13
January 2005 400,000,000.00 August 2007 207,088,305.49
February 2005 400,000,000.00 September 2007 191,696,205.88
March 2005 400,000,000.00 October 2007 176,223,053.74
April 2005 400,000,000.00 November 2007 160,668,422.26
May 2005 400,000,000.00 December 2007 145,031,882.36
June 2005 400,000,000.00 January 2008 129,313,002.74
July 2005 400,000,000.00 February 2008 113,511,349.82
August 2005 400,000,000.00 March 2008 97,626,487.70
September 2005 400,000,000.00 April 2008 81,657,978.24
October 2005 400,000,000.00 May 2008 65,605,380.95
November 2005 400,000,000.00 June 2008 49,468,253.03
December 2005 400,000,000.00 July 2008 33,246,149.37
January 2006 400,000,000.00
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CLASS A-II-1 NOTES
SCHEDULE I-A-II
PAYMENT SCHEDULED PAYMENT SCHEDULED
DATE NOTIONAL BALANCE DATE NOTIONAL BALANCE
---- ---------------- ---- ----------------
July 2003 750,000,000.00 February 2006 750,000,000.00
August 2003 750,000,000.00 March 2006 750,000,000.00
September 2003 750,000,000.00 April 2006 750,000,000.00
October 2003 750,000,000.00 May 2006 750,000,000.00
November 2003 750,000,000.00 June 2006 750,000,000.00
December 2003 750,000,000.00 July 2006 750,000,000.00
January 2004 750,000,000.00 August 2006 723,043,468.34
February 2004 750,000,000.00 September 2006 695,944,987.54
March 2004 750,000,000.00 October 2006 668,703,810.12
April 2004 750,000,000.00 November 2006 641,319,184.67
May 2004 750,000,000.00 December 2006 613,790,355.79
June 2004 750,000,000.00 January 2007 586,116,564.14
July 2004 750,000,000.00 February 2007 558,297,046.37
August 2004 750,000,000.00 March 2007 530,331,035.10
September 2004 750,000,000.00 April 2007 502,217,758.93
October 2004 750,000,000.00 May 2007 473,956,442.36
November 2004 750,000,000.00 June 2007 445,546,305.86
December 2004 750,000,000.00 July 2007 416,986,565.74
January 2005 750,000,000.00 August 2007 388,276,434.23
February 2005 750,000,000.00 September 2007 359,415,119.38
March 2005 750,000,000.00 October 2007 330,401,825.09
April 2005 750,000,000.00 November 2007 301,235,751.05
May 2005 750,000,000.00 December 2007 271,916,092.74
June 2005 750,000,000.00 January 2008 242,442,041.41
July 2005 750,000,000.00 February 2008 212,812,784.06
August 2005 750,000,000.00 March 2008 183,027,503.40
September 2005 750,000,000.00 April 2008 153,085,377.81
October 2005 750,000,000.00 May 2008 122,985,581.39
November 2005 750,000,000.00 June 2008 92,727,283.86
December 2005 750,000,000.00 July 2008 62,309,650.58
January 2006 750,000,000.00
S-119
ANNEX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to the
Class A-II-2 Notes, or the Auction Notes. The term "note," as used in this
Annex, refers to the Auction Notes, and the term "noteholder" refers to
noteholders holding the Auction Notes. Capitalized terms used in this Annex I
and not otherwise defined have the meanings ascribed in the accompanying
prospectus supplement.
"ALL HOLD RATE" means ninety percent (90%) of LIBOR.
"AUCTION" means the implementation of the Auction Procedures on an
Auction Date.
"AUCTION AGENT" means Wachovia Securities, LLC, or any successor
appointed under the Auction Agent Agreement.
"AUCTION AGENT AGREEMENT" means the Auction Agent Agreement, to be
entered into as of the closing date, among the indenture trustee (solely in its
capacity as indenture trustee, and not in its individual capacity), the Auction
Agent and Wachovia Asset Securities, Inc., as holder of the Certificates,
including any amendment thereof or supplement thereto.
"AUCTION AGENT FEE" means the fee paid to the Auction Agent pursuant to
the Auction Agent Agreement.
"AUCTION DATE" means the Business Day immediately preceding the first
day of each Interest Period, commencing in July 2003, other than each Interest
Period commencing after the Auction Notes are no longer maintained by the
Depository in Book-Entry Form. Notwithstanding the foregoing, the Auction Date
for one or more Interest Periods may be changed pursuant to the Auction Agent
Agreement, as described herein.
"AUCTION NOTES" means the Class A-II-2 notes.
"AUCTION PROCEDURES" means the procedures set forth in the Auction
Agent Agreement, and described in this prospectus supplement by which the
Auction Rate is determined.
"AUCTION RATE" means the rate of interest per annum that results from
implementation of the Auction Procedures.
"AUTHORIZED DENOMINATIONS" means, with respect to the Auction Notes,
$25,000 and integral multiples of $25,000 in excess thereof.
"BROKER-DEALER" means Wachovia Securities, LLC or any other broker or
dealer (each as defined in the Securities Exchange Act of 1934, as amended),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth in the Auction Procedures that (a) is a
Participant (or an Affiliate of a Participant), (b) has been appointed as such
by the Depositor, with the consent of the Market Agent and (c) has entered into
a Broker-Dealer Agreement that is in effect on the date of reference.
"BROKER-DEALER AGREEMENT" means the Broker-Dealer Agreement, to be
entered into as of the closing date, among the Auction Agent, the Broker-Dealer
and Wachovia Asset Securities, Inc., as Holder of the Certificates, and each
other agreement among the Auction Agent, the Holder of the Certificates and an
eligible Broker-Dealer, as from time to time, amended or supplemented.
"BROKER-DEALER FEE" means the fee paid to the Broker-Dealer pursuant to
any Broker-Dealer Agreement.
"BUSINESS DAY" means any day other than (i) a Saturday or Sunday or
(ii) a day on which the New York Stock Exchange or banking institutions in the
States of New York, North Carolina or Delaware are authorized or obligated by
law or executive order to be closed.
"EXISTING NOTEHOLDER" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Noteholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of the Auction Notes.
"EXISTING NOTEHOLDER REGISTRY" means the registry of Persons who are
owners of the Auction Notes, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"HOLDER OF THE CERTIFICATES" means Wachovia Asset Securitization, Inc.,
a North Carolina corporation.
"MARKET AGENT" means Wachovia Securities, LLC, in such capacity
hereunder, or any successor to it in such capacity hereunder.
"MAXIMUM AUCTION RATE" means, (A) LIBOR plus 0.40%, if the ratings
assigned by the Rating Agencies to the Auction Notes are "AAA" and "Aaa" or (B)
LIBOR plus 1.25%, if the ratings assigned by the Rating Agencies to the Auction
Notes are less than "AAA" and "Aaa". However, in no event will the Maximum
Auction Rate on the Class A-II-2 notes exceed the lesser of the Class A-II-2 Net
WAC Rate or 15.00% per annum. For purposes of the Auction Agent and the Auction
Procedures, the ratings referred to in this definition shall be the last rating
of which the Auction Agent has been given notice pursuant to the servicing
agreement and the Auction Agent Agreement.
"PARTICIPANT" means a broker, dealer, bank, other financial institution
or other Person for whom from time to time the Depository effects book-entry
transfers and pledges of securities deposited with the Depository.
"PERSON" means any individual, corporation, estate, partnership,
limited liability company, joint venture, association, joint stock company,
trust (including any beneficiary thereof), unincorporated organization or
government or any such agency or political subdivision thereof.
"POTENTIAL NOTEHOLDER" means any Person (including an Existing
Noteholder that is (i) a Broker-Dealer when dealing with the Auction Agent and
(ii) a potential beneficial owner when dealing with a Broker-Dealer) who may be
interested in acquiring Auction Notes (or, in the case of an Existing Noteholder
thereof, an additional principal amount of Auction Notes).
"RATE ADJUSTMENT DATE" means the date on which the Note Rate is
effective and means, with respect to the Auction Notes, the date of commencement
of each Interest Period.
"RATE DETERMINATION DATE" means the related Auction Date, or if no
Auction Date is applicable, the Business Day immediately preceding the date of
commencement of the related Interest Period.
EXISTING NOTEHOLDERS AND POTENTIAL NOTEHOLDERS
Participants in each Auction may include: (i) Existing Noteholders as
of the close of business on the Business Day preceding each Auction Date
according to the records of the Auction Agent; and (ii) Potential Noteholders.
See "--Broker-Dealer."
By purchasing an Auction Note, whether in an Auction or otherwise, each
prospective purchaser of the Auction Notes or its Broker-Dealer must agree and
will be deemed to have agreed: (i) to participate in Auctions on the terms
described in this prospectus supplement; (ii) so long as the beneficial
ownership of the Auction Notes is maintained in book-entry form to sell,
transfer or otherwise dispose of the Auction Notes only pursuant to a Bid (as
defined below) or a Sell Order (as defined below) in an Auction, or to or
through a Broker-Dealer, provided that in the case of all transfers other than
those pursuant to an Auction, the Existing Noteholder of the Auction Notes so
transferred, its Participant or Broker-Dealer shall advise the Auction Agent of
such transfer; and (iii) to have its beneficial ownership of the Auction Notes
maintained at all times in book-entry form for the account of its Participant,
which in turn will maintain records of such beneficial ownership, and to
authorize such Participant to disclose to the Auction Agent such information
with respect to such beneficial ownership as the Auction Agent may request.
The principal amount of the Auction Notes purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
the Auction Notes on the Auction Date will be made for settlement on the first
day of the Interest Period immediately following such Auction Date at a price
equal to 100% of the principal amount thereof, plus accrued but unpaid interest
thereon. The Auction Agent is entitled to rely upon the terms of any Order
submitted to it by a Broker-Dealer.
AUCTION AGENT
Wachovia Securities, LLC, a North Carolina limited liability company,
will be appointed as Auction Agent in connection with Auctions. The indenture
trustee will enter into the Auction Agent Agreement with Wachovia Securities,
LLC, as the Auction Agent. Any substitute Auction Agent ("SUBSTITUTE AUCTION
AGENT") will be (i) a bank, national banking association or trust company duly
organized under the laws of the United States of America or any state or
territory thereof having its principal place of business in the Borough of
Manhattan, New York, or such other location as approved by the indenture trustee
and the Market Agent in writing and having a combined capital stock or surplus
of at least $50,000,000, or (ii) a member of the National Association of
Securities Dealers, Inc. having a capitalization of at least $50,000,000, and,
in either case, authorized by law to perform all the duties imposed upon it
under the Auction Agent Agreement. The Auction Agent may at any time resign by
giving at least 90 days notice to the indenture trustee, the holder of the
Certificates, the servicer and the Market Agent. The Auction Agent may be
removed at any time by the indenture trustee for cause or by the Noteholders
holding 66-2/3% of the aggregate principal amount of the Auction Notes then
outstanding with or without cause, and if by such Noteholders, by an instrument
signed by such Noteholders or their attorneys and filed with the Auction Agent,
the indenture trustee and the Market Agent upon at least 90 days notice. Neither
resignation nor removal of the Auction Agent pursuant to the preceding two
sentences will be effective until and unless a Substitute Auction Agent has been
appointed and has accepted such appointment. If required by the Noteholders
holding 66-2/3% of the aggregate principal amount of the Auction Notes then
outstanding or by the Market Agent, a substitute Auction Agent Agreement shall
be entered into with a Substitute Auction Agent. Notwithstanding the foregoing,
the Auction Agent may terminate the Auction Agent Agreement if, within 25 days
after notifying the indenture trustee, the holder of the Certificates and the
Market Agent in writing that it has not received payment of any Auction Agent
Fee due it in accordance with the Auction Agent Agreement, the Auction Agent
does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the control of
any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the indenture trustee (after receipt of a
certificate from the Market Agent confirming that any proposed Substitute
Auction Agent meets the requirements described in the immediately preceding
paragraph above), shall use its best efforts to appoint a Substitute Auction
Agent (but in no event shall the indenture trustee be obligated to assume the
obligations of the Auction Agent).
The Auction Agent is acting as agent for the trust fund in connection
with Auctions. In the absence of bad faith, negligent failure to act or
negligence on its part, the Auction Agent will not be liable for any action
taken, suffered or omitted in good faith or any error of judgment made by it in
the performance of its duties under the Auction Agent Agreement and will not be
liable for any error of judgment made in good faith unless the Auction Agent
will have been negligent in ascertaining (or failing to ascertain) the pertinent
facts. The Auction Agent Fee is required to be paid by the holder of the
Certificates and if not so paid will be paid from available funds in the order
of priority described in this prospectus supplement. To the extent funds are
available as described in "Description of the Securities--Priority of
Distributions" in this prospectus supplement, the trust fund will indemnify and
hold harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and any Broker-Dealer Agreement, including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the trust fund will
not indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under any Broker-Dealer Agreement,
such fees and expenses being payable as described above.
BROKER-DEALER
Existing Noteholders and Potential Noteholders may participate in
Auctions only by submitting orders (in the manner described below) through a
Broker-Dealer.
Each Broker-Dealer is entitled to a Broker-Dealer Fee, which is payable
in the priority described in this prospectus supplement and guaranteed by the
holder of the Certificates pursuant to the related Broker-Dealer Agreement.
AUCTION PROCEDURES
GENERAL
Pursuant to the Auction Agent Agreement, Auctions to establish the
Auction Rate for the Auction Notes issued by the trust fund will be held on each
applicable Auction Date, except as described below, by application of the
Auction Procedures described in this prospectus supplement.
In the event the ownership of the Auction Notes is no longer maintained
in book-entry form by the Depository, no further Auctions will be held.
The Auction Agent will calculate the Maximum Auction Rate and the All
Hold Rate on each Auction Date. The servicer will calculate and, no later than
the Business Day preceding each Auction Date, will report to the Auction Agent
in writing, the Class A-II-2 Net WAC Rate. If the Auction Notes are no longer
maintained in book-entry form, the servicer will calculate the Maximum Auction
Rate on the Business Day immediately preceding the first day of each Interest
Period. The servicer will determine
LIBOR for each Interest Period and will promptly advise the Auction Agent. The
determination by the servicer of LIBOR will (in the absence of manifest error)
be final and binding upon the Noteholders and all other parties.
SUBMISSION OF ORDERS
So long as the ownership of the Auction Notes is maintained in
book-entry form, an Existing Noteholder may sell, transfer or otherwise dispose
of Auction Notes pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction only through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Noteholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for the Auction Notes will be conducted on each applicable Auction
Date, if there is an Auction Agent on such Auction Date, in the following
manner.
Prior to the "Submission Deadline" (defined as 1:00 p.m., eastern time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date relating to a note:
(a) each Existing Noteholder may submit to a Broker-Dealer by telephone
or otherwise information as to: (i) the principal amount of Auction Notes owned
by such Existing Noteholder which such Existing Noteholder desires to continue
to hold without regard to the Note Rate for the next succeeding Interest Period
(a "Hold Order"); (ii) the principal amount of Auction Notes owned by such
Existing Noteholders which such Existing Noteholder offers to sell if the Note
Rate for the next succeeding Interest Period will be less than the rate per
annum specified by such Existing Noteholder (a "Bid"); and/or (iii) the
principal amount of Auction Notes owned by such Existing Noteholder which such
Existing Noteholder offers to sell without regard to the Note Rate for the next
succeeding Interest Period (a "Sell Order"); and
(b) the Broker-Dealer may contact Potential Noteholders to determine
the principal amount of Auction Notes which each such Potential Noteholder
offers to purchase, if the Note Rate for the next succeeding Interest Period
will not be less than (and in some cases equal to) the rate per annum specified
by such Potential Noteholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Noteholder and each Potential Noteholder placing an Order is referred to as a
"Bidder."
Subject to the provisions described below under "Validity of Orders," a
Bid by an Existing Noteholder will constitute an irrevocable offer to sell: (i)
the principal amount of Auction Notes specified in such Bid if the Note Rate as
determined in the Auction Procedures will be less than the rate specified in
such Bid, (ii) such principal amount or a lesser principal amount of Auction
Notes to be determined as described below in "Acceptance and Rejection of
Orders," if the Note Rate will be equal to the rate specified in such Bid or
(iii) such principal amount or a lesser principal amount of the Auction Notes to
be determined as described below under "Acceptance and Rejection of Orders," if
the Note Rate is less than the rate specified in such Bid and Sufficient Bids
(as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Noteholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Auction Notes specified in such Sell Order
or (ii) such principal amount or a lesser principal amount of Auction Note as
described below under "Acceptance and Rejection of Orders," if Sufficient Bids
have not been made.
Subject to the provisions described below under "Validity of Orders," a
Bid by a Potential Noteholder will constitute an irrevocable offer to purchase
(i) the principal amount of the Auction Note specified in such Bid if the Note
Rate as determined in the Auction Procedures will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal amount
as described below in "Acceptance and Rejection of Orders," if the Note Rate as
determined in the Auction Procedures is equal to the rate specified in such Bid.
The Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount of the
Auction Notes that is the subject of such order; (iii) to the extent that such
Bidder is an Existing Noteholder: (a) the principal amount of the Auction Notes,
if any, subject to any Hold Order placed by such Existing Noteholder; (b) the
principal amount of the Auction Notes, if any, subject to any Bid placed by such
Existing Noteholder and the rate specified in such Bid; and (c) the principal
amount of the Auction Notes, if any, subject to any Sell Order placed by such
Existing Noteholder, and (iv) to the extent such Bidder is a Potential
Noteholder, the rate specified in such Potential Noteholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering the Auction Notes owned by any Existing
Noteholder are not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent will deem a Hold Order to have been submitted on
behalf of such Existing Noteholder covering the principal amount of Auction
Notes owned by such Existing Noteholder and not subject to an Order submitted to
the Auction Agent.
None of the seller, the indenture trustee, the paying agent or the
Auction Agent will be responsible for any failure of a Broker-Dealer to submit
an Order to the Auction Agent on behalf of any Existing Noteholder or Potential
Noteholder.
An Existing Noteholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Auction Notes then
held by such Existing Noteholder. An Existing Noteholder that offers to purchase
additional Auction Notes is, for purposes of such offer, treated as a Potential
Noteholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i)
be treated as a Sell Order if submitted by an Existing Noteholder and (ii) not
be accepted if submitted by a Potential Noteholder.
VALIDITY OF ORDERS
If any Existing Noteholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Auction Notes owned by such Existing Noteholder, such
Orders will be considered valid as follows and in the order of priority
described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of the Auction Notes held by such Existing
Noteholder.
BIDS. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of the Auction Notes held by such Existing
Noteholder over the aggregate principal amount of the Auction Notes subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Noteholder and the aggregate principal amount of Auction Notes subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates is submitted on behalf of such Existing
Noteholder, such Bids will be considered valid first in the ascending order of
their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Auction Notes, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Noteholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Auction Notes owned by such
Existing Noteholder over the aggregate principal amount of Auction Notes subject
to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for an Auction Note is submitted on behalf of any
Potential Noteholder, each Bid submitted will be a separate Bid with the rate
and principal amount therein specified. Any Bid or Sell Order submitted by an
Existing Noteholder covering an aggregate principal amount of Auction Notes not
equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Noteholder covering an aggregate principal amount of Auction Notes not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by the Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Auction Notes over the
sum of the aggregate principal amount of such Auction Notes subject to Submitted
Hold Orders (such excess being in this prospectus supplement hereinafter
referred to as the "Available Notes");
(b) from such Submitted Orders whether the aggregate principal amount
of Auction Notes subject to Submitted Bids by Potential Noteholders specifying
one or more rates equal to or lower than the Maximum Auction Rate exceeds or is
equal to the sum of (i) the aggregate principal amount of Auction Notes subject
to Submitted Bids by Existing Noteholders specifying one or more rates higher
than the Maximum Auction Rate and (ii) the aggregate principal amount of Auction
Notes subject to Submitted Sell Orders (in the event such excess or such
equality exists other than because all of the Auction Notes are subject to
Submitted Hold Orders, such Submitted Bids by Potential Noteholders above will
be in this prospectus hereinafter referred to collectively as "Sufficient
Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Noteholders of such
Auction Note specifying such lowest rate and all other
Submitted Bids from Existing Noteholders of such Auction Note
specifying lower rates were rejected (thus entitling such
Existing Noteholders to
continue to hold the principal amount of such Auction Notes
subject to such Submitted Bids); and
(ii) each such Submitted Bid from Potential Noteholders of such
Auction Notes specifying such lowest rate and all other
Submitted Bids from Potential Noteholders specifying lower
rates were accepted;
the result would be that such Existing Noteholders described in subparagraph
(c)(i) above would continue to hold an aggregate principal amount of Auction
Notes which, when added to the aggregate principal amount of Auction Notes to be
purchased by such Potential Noteholders described in this subparagraph (c)(ii)
would equal not less than the Available Notes.
DETERMINATION OF AUCTION RATE AND NOTE RATE; NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the servicer of the Maximum Auction Rate,
the All Hold Rate and the components thereof on the Auction Date, and based on
such determinations, the Auction Rate for the next succeeding Interest Period as
follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Auction Notes are subject to Submitted Hold Orders), that the Auction Rate for
the next succeeding Interest Period will be equal to the Maximum Auction Rate;
or
(c) if all the Auction Notes are subject to Submitted Hold Orders,
that the Auction Rate for the next succeeding Interest Period will be equal to
the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the indenture trustee of the Note Rate,
which rate will be the lesser of (a) the Auction Rate and (b) the Class A-II-2
Net WAC Rate.
At any time when a scheduled Auction is not being held for any reason,
the Auction Rate will be the Maximum Auction Rate for the applicable period.
ACCEPTANCE AND REJECTION OF ORDERS
Existing Noteholders will continue to hold the principal amount of
Auction Notes that are subject to Submitted Hold Orders. If the Class A-II-2 Net
WAC Rate is equal to or greater than the Bid Auction Rate and Sufficient Bids,
as described above under "Determination of Sufficient Bids and Bid Auction
Rate," have been received by the Auction Agent, the Bid Auction Rate will be the
Note Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
Auction Agent Agreement and described below under "Sufficient Bids."
If the Class A-II-2 Net WAC Rate is less than the Auction Rate, the
Note Rate will be the Class A-II-2 Net WAC Rate. If the Auction Agent has not
received Sufficient Bids as described above under "Determination of Sufficient
Bids and Bid Auction Rate" (other than because all of the Auction Notes are
subject to Submitted Holds Orders), the Note Rate will be the lesser of (a) the
Maximum Auction Rate and (b) the Class A-II-2 Net WAC Rate. In any of the cases
described above in this paragraph, Submitted
Orders will be accepted or rejected and the Auction Agent will take such other
action as described below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with respect to the
Auction Notes and the Class A-II-2 Net WAC Rate is equal to or greater than the
Bid Auction Rate (in which case the Note Rate would be the Bid Auction Rate),
all Submitted Sell Orders will be accepted and, subject to the denomination
requirements described below, Submitted Bids will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that is
higher than the Note Rate will be accepted, thus requiring each such Existing
Noteholder to sell the aggregate principal amount of Auction Notes subject to
such Submitted Bids;
(b) Existing Noteholders' Submitted Bids specifying any rate that is
lower than the Note Rate will be rejected, thus entitling each such Existing
Noteholder to continue to hold the aggregate principal amount of Auction Notes
subject to such Submitted Bids;
(c) Potential Noteholders' Submitted Bids specifying any rate that is
lower than the Note Rate will be accepted;
(d) Each Existing Noteholder's Submitted Bid specifying a rate that is
equal to the Note Rate will be rejected, thus entitling such Existing Noteholder
to continue to hold the aggregate principal amount of Auction Notes subject to
such Submitted Bid, unless the aggregate principal amount of Auction Notes
subject to such Submitted Bids will be greater than the principal amount of such
Auction Notes (the "remaining principal amount") equal to the excess of the
Available Notes over the aggregate principal amount of such Auction Notes
subject to Submitted Bids described in subparagraphs (b) and (c) above, in which
event such Submitted Bid of such Existing Noteholder will be rejected in part
and such Existing Noteholder will be entitled to continue to own the principal
amount of such Auction Notes subject to such Submitted Bid, but only in an
amount equal to the aggregate principal amount of such Auction Notes obtained by
multiplying the remaining principal amount by a fraction, the numerator of which
will be the principal amount of Auction Notes held by such Existing Noteholder
subject to such Submitted Bid and the denominator of which will be the sum of
the principal amount of such Auction Notes subject to such Submitted Bids made
by all such Existing Noteholders that specified a rate equal to the Note Rate;
and
(e) Each Potential Noteholder's Submitted Bid specifying a rate that
is equal to the Note Rate will be accepted, but only in an amount equal to the
principal amount of such Auction Notes obtained by multiplying the excess of the
aggregate principal amount of Available Notes over the aggregate principal
amount of such Auction Notes subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Auction Notes subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of Auction
Notes subject to Submitted Bids made by all such Potential Noteholders that
specified a rate equal to the Note Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect
to the Auction Notes (other than because all of the Auction Notes are subject to
Submitted Hold Orders) or if the Class A-II-2 Net WAC Rate is less than the Bid
Auction Rate (in which case the Note Rate will be the Class A-II-2 Net WAC
Rate), subject to the denomination requirements described below, Submitted
Orders will be accepted or rejected as follows in the following order of
priority and all other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that is
equal to or lower than the Note Rate will be rejected, thus entitling such
Existing Noteholders to continue to hold the aggregate principal amount of
Auction Notes subject to such Submitted Bids;
(b) Potential Noteholders' Submitted Bids specifying any rate that is
equal to or lower than the Note Rate will be accepted, and specifying any rate
that is higher than the Note Rate will be rejected; and
(c) each Existing Noteholder's Submitted Bid specifying any rate that
is higher than the Note Rate and the Submitted Sell Order of each Existing
Noteholder will be accepted, thus entitling each Existing Noteholder that
submitted any such Submitted Bid or Submitted Sell Order to sell such Auction
Notes subject to such Submitted Bid or Submitted Sell Order, but in both cases
only in an amount equal to the aggregate principal amount of such Auction Notes
obtained by multiplying the aggregate principal amount of such Auction Notes
subject to Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of such Auction Notes
owned by such Existing Noteholder subject to such Submitted Bid or Submitted
Sell Order and the denominator of which will be the aggregate principal amount
of such Auction Notes subject to all such Submitted Bids and Submitted Sell
Orders.
ALL HOLD ORDERS. If all Auction Notes are subject to Submitted Hold
Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the procedures
described above under "Sufficient Bids" and "Insufficient Bids", any Existing
Noteholder would be entitled or required to sell, or any Potential Noteholder
would be entitled or required to purchase, a principal amount of Auction Notes
that is not equal to an Authorized Denomination or an integral multiple thereof,
the Auction Agent will, in such manner as in its sole discretion it will
determine, round up or down the principal amount of such Auction Notes to be
purchased or sold by any Existing Noteholder or Potential Noteholder so that the
principal amount of Auction Notes purchased or sold by each Existing Noteholder
or Potential Noteholder will be equal to an Authorized Denomination or an
integral multiple of $25,000 in excess thereof. If, as a result of the
procedures described above under "Insufficient Bids", any Potential Noteholder
would be entitled or required to purchase less than a principal amount of
Auction Notes equal to an Authorized Denomination or any integral multiple
thereof, the Auction Agent will, in such manner as in its sole discretion it
will determine, allocate Auction Notes for purchase among Potential Noteholders
so that only Auction Notes in an Authorized Denomination or any integral
multiples of $25,000 in excess thereof are purchased by any Potential
Noteholder, even if such allocation results in one or more of such Potential
Noteholders not purchasing any such Auction Notes.
Based on the results of each Auction, the Auction Agent is to determine
the aggregate principal amount of Auction Notes to be purchased and the
aggregate principal amount of such Auction Notes to be sold by Potential
Noteholders and Existing Noteholders on whose behalf the Broker-Dealer submitted
Bids or Sell Orders and with respect to each Broker-Dealer to the extent that
such aggregate principal amount of the Auction Notes to be sold differs from
such aggregate principal amount of Auction Notes to be purchased, determine to
which other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer will deliver, or from which Broker-Dealers acting for one or
more sellers such Broker-Dealer will receive, as the case may be, such Auction
Notes.
Any calculation by the servicer or the Auction Agent, as applicable, of
the Note Rate, LIBOR, the All Hold Rate, the Class A-II-2 Net WAC Rate or the
Maximum Auction Rate will, in the absence of manifest error, be binding on all
other parties.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise the Broker-Dealer of the Note
Rate for the Auction Notes for the next Interest Period and, whether the Bids or
Sell Orders were accepted or rejected, in whole or in part by telephone not
later than (1) 3:00 p.m. if the Note Rate is the Auction Rate and (2) 4:00 p.m.
if the Note Rate is the Class A-II-2 Net WAC Rate, eastern time, on the Auction
Date. The Broker-Dealer is required to then advise such Bidder of the next
Auction Date, the applicable Note Rate for the next Interest Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, confirm purchases and sales with each Existing
Noteholder or Potential Noteholder, as the case may be, purchasing or selling
Auction Notes as a result of the Auction and advise each Existing Noteholder or
Potential Noteholder, as the case may be, purchasing or selling Auction Notes as
a result of the Auction to give instructions to its Participant to pay the
purchase price against delivery of such Auction Notes or to deliver such Auction
Notes against payment therefor, as appropriate. Pursuant to the Auction Agent
Agreement, the Auction Agent is to record each transfer of Auction Notes on the
Existing Noteholders Registry to be maintained by the Auction Agent.
In accordance with the Depository's normal procedures, on the Business
Day after the Auction Date, the transactions described above will be executed
through the Depository, so long as the Depository is the Relevant Depository,
and the accounts of the respective Participants at the Depository will be
debited and credited and the Auction Notes delivered as necessary to effect the
purchases and sales of the Auction Notes as determined in the Auction.
Purchasers are required to make payment through their Participants in same-day
funds to the Depository against delivery through their Participants. The
Depository will make payment in accordance with its normal procedures, which now
provide for payment against delivery by its Participants in immediately
available funds.
If any Existing Noteholder on whose behalf the Broker-Dealer has
submitted a Bid or Sell Order for Auction Notes that was accepted in whole or in
part fails to instruct its Participant to deliver such Auction Notes, the
Broker-Dealer will instruct such Participant to deliver such Auction Notes
against payment therefor and may deliver to any person that was to have
purchased Auction Notes in such Auction a principal amount of Auction Notes that
is less than the principal amount of Auction Notes that was the subject of the
Bid or Sell Order by such person. In such event, the principal amount of Auction
Notes to be delivered will be determined by the Broker-Dealer. Delivery of such
lesser principal amount of Auction Notes will constitute good delivery. None of
the indenture trustee, the Market Agent, the Enhancer, the Depositor, the Paying
Agent or the Auction Agent will have any responsibility or liability with
respect to the failure of a Potential Noteholder, Existing Noteholder or the
Broker-Dealer or Participant to deliver the principal amount of Auction Notes or
to pay for the Auction Notes purchased or sold pursuant to an Auction or
otherwise. For a further description of the settlement procedures, see
"Settlement Procedures" attached hereto as Annex III.
INDENTURE TRUSTEE AND PAYING AGENT NOT RESPONSIBLE FOR
AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The indenture trustee and/or the paying agent, as applicable, shall not
be liable or responsible for the actions of or failure to act by the Auction
Agent, Market Agent or the Broker-Dealer under the Agreement, the Auction Agent
Agreement, or any Broker-Dealer Agreement. The indenture trustee and the paying
agent may conclusively rely upon any information required to be furnished by the
Servicer, the Auction Agent, the Market Agent or any Broker-Dealer without
undertaking any independent review or investigation of the truth or accuracy of
such information.
CHANGES IN THE AUCTION DATE
The Market Agent may specify an earlier or later Auction Date (but in
no event more than five Business Days earlier or later) than the Auction Date
that would otherwise be determined in accordance with the definition of "Auction
Date" with respect to one or more specified Interest Periods, if, the Market
Agent determines (in its reasonable judgment) that such a change is necessary in
order to conform with then current market practice with respect to similar
securities or to accommodate economic and financial factors that may affect or
be relevant to the day of the week constituting an Auction Date and the Note
Rate. The Market Agent will provide notice of its determination to specify an
earlier or later Auction Date for one or more Interest Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the indenture trustee and the Auction Agent. The changes in Auction
terms described above may be made with respect to any Authorized Denomination of
Auction Notes. In connection with any change in Auction terms described above,
the Auction Agent is to provide such further notice to such parties as is
specified in the Auction Agent Agreement.
ANNEX II
SETTLEMENT PROCEDURES
The following description of Settlement Procedures applies to the
Auction Notes. Capitalized terms used in this prospectus supplement and not
otherwise defined have the meanings ascribed in Annex I and the accompanying
prospectus supplement.
(a) Not later than (1) 3:00 p.m. if the Note Rate is the Auction Rate
or (2) 4:00 p.m. if the Note Rate is the Class A-II-2 Net WAC Rate, the Auction
Agent is to notify by telephone each Broker-Dealer that participated in the
Auction held on such Auction Date and submitted an Order on behalf of an
Existing Noteholder or Potential Noteholder of:
(i) the Note Rate fixed for the Auction Note for the next
Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "SELLER'S BROKER-DEALER") submitted
Bids or Sell Orders on behalf of an Existing Noteholder,
whether such Bid or Sell Order was accepted or rejected, in
whole or in part, and the principal amount of Auction Notes,
if any, to be sold by such Existing Noteholder;
(iv) if such Broker-Dealer (a "BUYER'S BROKER-DEALER") submitted a
Bid on behalf of a Potential Noteholder, whether such Bid was
accepted or rejected, in whole or in part, and the principal
amount of Auction Notes, if any, to be purchased by such
Potential Noteholder;
(v) if the aggregate amount of Auction Notes to be sold by all
Existing Noteholders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds the
aggregate principal amount of Auction Notes to be purchased
by all Potential Noteholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or
more Buyer's Broker-Dealers and the name of the Participant,
if any, of each such Buyer's Broker-Dealer acting for one or
more purchasers of such excess principal amount of Auction
Notes and the principal amount of Auction Notes to be
purchased from one or more Existing Noteholders on whose
behalf such Seller's Broker-Dealer acted by one or more
Potential Noteholders on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the principal amount of Auction Notes to be purchased by
all Potential Noteholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of Auction
Notes to be sold by all Existing Noteholders on whose behalf
such Seller's Broker-Dealer submitted a Bid or a Sell Order,
the name or names of one or more Seller's Broker-Dealers (and
the name of the Participant, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess
principal amount of Auction Notes and the principal amount of
Auction Notes to be sold to one or more Potential Noteholders
on whose behalf such Buyer's Broker-Dealer acted by one or
more Existing Noteholder on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Noteholder or Potential Noteholder is to:
(i) advise each Existing Noteholder and Potential Noteholder on
whose behalf such Broker-Dealer submitted a Bid or Sell Order
in the Auction on such Auction Date whether such Bid or Sell
Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Noteholder on whose
behalf such Buyer's Broker-Dealer submitted a Bid that was
accepted, in whole or in part, to instruct such Potential
Noteholder's Participant to pay to such Buyer's Broker-Dealer
(or its Participant) through the Depository the amount
necessary to purchase the principal amount of the Auction
Notes to be purchased pursuant to such Bid against receipt of
such Auction Notes together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Noteholder on whose
behalf such Seller's Broker-Dealer submitted a Sell Order
that was accepted, in whole or in part, or a Bid that was
accepted, in whole or in part, to instruct such Existing
Noteholder's Participant to deliver to such Seller's
Broker-Dealer (or its Participant) through the Depository the
principal amount of the Auction Notes to be sold pursuant to
such Order against payment therefor;
(iv) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order and each Potential
Noteholder on whose behalf such Broker-Dealer submitted a Bid
of the Note Rate for the next Interest Period;
(v) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date;
and
(vi) advise each Potential Noteholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or
in part, of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or
Sell Order in an Auction is required to allocate any funds
received by it in connection with such Auction pursuant to
paragraph (b)(ii) above, and any Auction Notes received by it in
connection with such Auction pursuant to paragraph (b)(iii) above,
among the Potential Noteholders, if any, on whose behalf such
Broker-Dealer submitted Bids, the Existing Noteholder, if any, on
whose behalf such Broker-Dealer submitted Bids or Sell Orders in
such Auction, and any Broker-Dealers identified to it by the
Auction Agent following such Auction pursuant to paragraph (a)(v)
or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Noteholder and Existing Noteholder with an
Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the
case may be:
(ii) each Seller's Broker-Dealer that is not a Participant of the
Depository will instruct its Participant to deliver such
Auction Notes through the Depository to a Buyer's
Broker-Dealer (or its Participant) identified to such
Seller's Broker-Dealer pursuant to (a)(v) above against
payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in the
Depository will instruct its Participant to pay through the
Depository to Seller's Broker-Dealer (or its Participant)
identified following such Auction pursuant to (a)(vi) above
the amount necessary to
purchase the Auction Notes to be purchased pursuant to
(b)(ii) above against receipt of such Auction Notes.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in (d)(i) above will instruct the Depository
to execute the transactions described under (b)(ii) or
(b)(iii) above for such Auction, and the Depository will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct
the Depository to execute the transactions described in
(d)(ii) above for such Auction, and the Depository will
execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct
the Depository to execute the transactions described in
(d)(iii) above for such Auction, and the Depository will
execute such transactions.
(f) If an Existing Noteholder selling Auction Notes in an Auction fails
to deliver such Auction Notes (by authorized book-entry), a
Broker-Dealer may deliver to the Potential Noteholder on behalf of
which it submitted a Bid that was accepted a principal amount of
Auction Notes that is less than the principal amount of Auction
Notes that otherwise was to be purchased by such Potential
Noteholder. In such event, the principal amount of Auction Notes to
be so delivered will be determined solely by such Broker-Dealer
(but only in Authorized Denominations).
Delivery of such lesser principal amount of Auction Notes will
constitute good delivery. Notwithstanding the foregoing terms of this paragraph
(f), any delivery or nondelivery of Auction Notes which will represent any
departure from the results of an Auction, as determined by the Auction Agent,
will be of no effect unless and until the Auction Agent will have been notified
of such delivery or nondelivery in accordance with the provisions of the Auction
Agent Agreement and the Broker-Dealer Agreements. None of the indenture trustee,
the paying agent or the Auction Agent will have any responsibility or liability
with respect to the failure of a Potential Noteholder, Existing Noteholder or
their respective Broker-Dealer or Participant to take delivery of or deliver, as
the case may be, the principal amount of the Auction Notes purchased or sold
pursuant to an Auction or otherwise.
PROSPECTUS
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
MORTGAGE-BACKED NOTES
(ISSUABLE IN SERIES)
- --------------------------------------------------------------------------------
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 10 OF THIS
PROSPECTUS.
The securities of any series will not be insured or guaranteed by any
governmental agency or instrumentality other than as expressly described in the
prospectus supplement for that series.
The securities of each series will represent interests in, or will represent
debt obligations of, the related trust only and will not represent interests in
or obligations of any other entity.
This prospectus may be used to offer and sell any series of securities only if
accompanied by the prospectus supplement for that series.
The securities of each series are not deposits or other obligations of a bank
and are not insured by the FDIC.
- --------------------------------------------------------------------------------
EACH TRUST--
o will issue a series of asset-backed certificates
or asset-backed Tnotes that will consist of one
or more classes; and
o may own--
o a pool or pools of single family and/or
multifamily mortgage loans, which may include
sub-prime mortgage gloans, and are secured by
either first or junior liens on one- to
four-family residential properties or
primarily residential properties consisting
of five or more residential dwelling units
and which may include limited retail, office
or other commercial space;
o a pool or pools of home improvement
installment sales contracts or installment
loans that are unsecured;
o a pool or pools of manufactured housing
installment sales contracts and installment
loan agreements secured by a security
interest in a new or used manufactured home,
and if indicated in the accompanying
prospectus supplement, by real property; and
o other assets described in this prospectus and
the accompanying prospectus supplement.
EACH SERIES OF SECURITIES--
o will represent ownership interest in the
related trust or will represent debt
obligations of the related trust;
o may be entitled to one or more of the other
types of credit support described in this
prospectus; and
o will be paid only from the assets of the
related trust.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE SECURITIES
OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
SEPTEMBER 25, 2002
TABLE OF CONTENTS
Important Notice About Information
Presented in this Prospectus and the
Accompanying Prospectus Supplement .............. 5
Summary of Prospectus .............................. 6
Risk Factors ....................................... 10
Risks Associated with the Securities ............ 10
Risks Associated with the Assets ................ 12
Violations of Federal Laws or State
Laws May Adversely Affect Ability to
Collect on Loans or Result in Losses ......... 15
Market Values of Manufactured Homes
May Increase the Risk of Loss ................ 16
Risk of Loss May Be Greater on
Unsecured Home Improvement
Loans ........................................ 16
Risks of Loss May Increase Due to
Defective Security Interest and Effects
of Certain Other Legal Aspects of the
Contracts .................................... 16
Description of the Trust Funds ..................... 17
Assets .......................................... 17
Mortgage Loans .................................. 19
General ...................................... 19
Loan-to-Value Ratio .......................... 19
Mortgage Loan Information in
Prospectus Supplements .................... 19
Payment Provisions of the Mortgage
Loans ..................................... 20
Revolving Credit Line Loans .................. 21
Unsecured Home Improvement Loans ................ 21
Unsecured Home Improvement Loan
Information in Prospectus
Supplements ............................... 21
Contracts ....................................... 22
General ...................................... 22
Contract Information in Prospectus
Supplements ............................... 22
Payment Provisions of the Contracts .......... 23
Pre-Funding Account ............................. 23
Accounts ........................................ 24
Credit Support .................................. 24
Cash Flow Agreements ............................ 24
Use of Proceeds .................................... 25
Yield Considerations ............................... 25
General ......................................... 25
Pass-Through Rate and Interest Rate ............. 25
Timing of Payment of Interest ................... 25
Payments of Principal; Prepayments .............. 25
Prepayments--Maturity and Weighted
Average Life ................................. 27
Other Factors Affecting Weighted
Average Life ................................. 28
Type of Asset ................................ 28
Termination .................................. 29
Defaults ..................................... 29
Foreclosures ................................. 29
Refinancing .................................. 30
Due-on-Sale Clauses .......................... 30
The Depositor ...................................... 30
Description of the Securities ...................... 31
General ......................................... 31
Distributions ................................... 31
Available Distribution Amount ................... 32
Distributions of Interest on the
Securities ................................... 33
Distributions of Principal of the
Securities ................................... 34
Categories of Classes of Securities ............. 34
Components ...................................... 39
Distributions on the Securities of
Prepayment Premiums .......................... 39
Allocation of Losses and Shortfalls ............. 39
Advances in Respect of Delinquencies ............ 39
Reports to Securityholders ...................... 40
Termination; Optional Purchase of
Mortgage Loans ............................... 42
Optional Purchases .............................. 43
Definitive Form ................................. 43
Book-Entry Registration and Form ................ 43
Description of the Agreements ...................... 47
Agreements Applicable to a Series ............... 47
REMIC Securities, FASIT Securities,
Grantor Trust Securities .................. 47
Securities That Are Partnership
Interests for Tax Purposes and
Notes ..................................... 47
Material Terms of the Pooling and
Servicing Agreements and Underlying
Servicing Agreements ......................... 47
General ...................................... 47
Assignment of Assets; Repurchases ............ 48
Representations and Warranties;
Repurchases ............................... 50
Collection Account and Related
Accounts .................................. 51
Realization Upon Defaulted Assets ............ 55
Hazard Insurance Policies .................... 56
Contracts .................................... 57
2
Fidelity Bonds and Errors and
Omissions Insurance ................... 58
Due-on-Sale Provisions ................... 58
Retained Interest; Servicing
Compensation and Payment of
Expenses .............................. 58
Evidence as to Compliance ................ 59
Certain Matters Regarding Servicers,
the Master Servicer and the
Depositor ............................. 59
Special Servicers ........................ 60
Events of Default under the
Agreements ............................ 61
Rights Upon Event of Default under
the Agreements ........................ 61
Amendment ................................ 62
The Trustee .............................. 63
Duties of the Trustee .................... 63
Certain Matters Regarding the
Trustee ............................... 63
Resignation and Removal of the
Trustee ............................... 63
Material Terms of the Indenture ............. 64
General .................................. 64
Events of Default ........................ 64
Discharge of Indenture ................... 66
Indenture Trustee's Annual Report ........ 66
The Indenture Trustee .................... 66
Description of Credit Support .................. 67
General ..................................... 67
Subordinate Securities ...................... 67
Cross-Support Provisions .................... 68
Limited Guarantee ........................... 68
Financial Guaranty Insurance Policy or
Surety Bond .............................. 68
Letter of Credit ............................ 68
Pool Insurance Policies ..................... 68
Special Hazard Insurance Policies ........... 68
Mortgagor Bankruptcy Bond ................... 68
Reserve Funds ............................... 69
Overcollateralization ....................... 69
Certain Legal Aspects of Mortgage Loans......... 70
General ..................................... 70
Types of Mortgage Instruments ............... 70
Interest in Real Property ................... 70
Cooperative Loans ........................... 71
Land Sale Contracts ......................... 72
Foreclosure ................................. 72
General .................................. 72
Judicial Foreclosure ..................... 73
Equitable Limitations on
Enforceability of Certain
Provisions ............................ 73
Non-Judicial Foreclosure/Power of
Sale .................................. 73
Public Sale .............................. 74
Rights of Redemption ..................... 74
Cooperative Loans ........................ 75
Junior Mortgages ............................ 76
Rights of Redemption ........................ 76
Anti-Deficiency Legislation, the
Bankruptcy Code and Other
Limitations on Lenders ................... 77
Enforceability of Certain Provisions ........ 79
Environmental Considerations ................ 80
Due-on-Sale Clauses ......................... 82
Prepayment Charges .......................... 82
Subordinate Financing ....................... 82
Applicability of Usury Laws ................. 83
Alternative Mortgage Instruments ............ 83
Homeowners Protection Act of 1998 ........... 84
Texas Home Equity Loans ..................... 84
Soldiers' and Sailors' Civil Relief Act of
1940 and Similar Laws .................... 84
Forfeitures in Drug, RICO and Money
Laundering Violations .................... 85
Certain Legal Aspects of the Contracts ......... 85
General ..................................... 85
Security Interests in the Manufactured
Homes .................................... 85
Enforcement of Security Interests in
Manufactured Homes ....................... 87
Soldiers' and Sailors' Civil Relief Act of
1940 and Similar Laws .................... 88
Consumer Protection Laws .................... 88
Transfers of Manufactured Homes;
Enforceability of Due-on-Sale Clauses..... 88
Applicability of Usury Laws ................. 88
Federal Income Tax Consequences ................ 89
General ..................................... 89
Taxable Mortgage Pools ................... 90
REMICS ...................................... 90
Classification of REMICs ................. 90
Characterization of Investments in
REMIC Securities ...................... 92
Tiered REMIC Structures .................. 93
Taxation of Owners of Regular
Securities ............................ 93
Election to Treat All Interest Under
the Constant Yield Method ............. 99
3
Treatment of Losses ...................... 99
Sale or Exchange of Regular
Securities ............................ 100
Taxation of Owners of Residual
Securities ............................ 100
Taxes That May Be Imposed on the
REMIC Pool ............................ 108
Taxation of Certain Foreign Investors..... 110
Grantor Trust Funds ......................... 112
Classification of Grantor Trust Funds..... 112
Standard Securities ......................... 112
General .................................. 112
Tax Status ............................... 113
Premium and Discount ..................... 114
Recharacterization of Servicing Fees ..... 114
Stripped Securities ......................... 116
General .................................. 116
Status of Stripped Securities ............ 117
Taxation of Stripped Securities .......... 117
Reporting Requirements and Backup
Withholding ........................... 119
Taxation of Certain Foreign Investors..... 119
Partnership Trust Funds ..................... 119
Classification of Partnership Trust
Funds ................................. 119
Characterization of Investments in
Partnership Securities and Debt
Securities ............................ 119
Taxation of Debt Securityholders ......... 120
Taxation of Owners of Partnership
Securities ............................ 120
Recent Tax Law Changes ...................... 125
State and Other Tax Consequences ............... 126
ERISA Considerations ........................... 126
Legal Investment ............................... 130
Methods of Distribution ........................ 131
Legal Matters .................................. 132
Financial Information .......................... 132
Ratings ........................................ 133
Where You can Find More Information ............ 133
Incorporation of Certain Information by
Reference ................................... 133
Index of Significant Definitions ............... 134
4
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the securities in two separate
documents that progressively provide more detail: (a) this prospectus, which
provides general information, some of which may not apply to a particular
series of securities, including your series, and (b) the accompanying
prospectus supplement, which will describe the specific terms of your series of
securities, including:
o the principal balances and/or interest rates of each class;
o the timing and priority of interest and principal payments;
o statistical and other information about the mortgage loans;
o information about credit enhancement, if any, for each class;
o the ratings for each class; and
o the method for selling the securities.
IF THE TERMS OF A PARTICULAR SERIES OF SECURITIES VARY BETWEEN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE
INFORMATION IN THE ACCOMPANYING PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the accompanying prospectus supplement including the information incorporated
by reference. No one has been authorized to provide you with different
information. The securities are not being offered in any state where the offer
is not permitted. The depositor does not claim the accuracy of the information
in this prospectus or the accompanying prospectus supplement as of any date
other than the dates stated on their respective covers.
Cross-references are included in this prospectus and in the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The following Table of Contents and the Table of Contents
included in the accompanying prospectus supplement provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 134 in this prospectus.
The depositor's principal executive office is located at 8739 Research
Drive, NC0121-Suite D, Charlotte, North Carolina 28288-0121 and the depositor's
telephone number is (704) 596-7616.
5
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SUMMARY OF PROSPECTUS
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. Please read this entire prospectus and the accompanying
prospectus supplement carefully to understand all of the terms of a series of
certificates.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the certificates
and is qualified by the full description of these calculations, cash flows and
other information in the prospectus and the prospectus supplement.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
TITLE OF Mortgage pass-through certificates and mortgage-backed notes
SECURITIES issuable in series.
DEPOSITOR Wachovia Asset Securitization, Inc., an wholly-owned indirect
subsidiary of Wachovia Corporation. The depositor is an
affiliate of Wachovia Securities, Inc.
ISSUER With respect to each series of certificates and/or notes, the
trust fund to be formed pursuant to either a pooling and
servicing agreement or a deposit trust agreement.
SERVICER The entity or entities named as servicer in the related
prospectus supplement. A servicer may be an affiliate of the
depositor. The entity, if any, named as
MASTER master servicer in the related
SERVICER prospectus supplement that will perform certain administration,
calculation and reporting functions with respect to the trust
fund and will supervise the servicers. The master servicer may
be an affiliate of the depositor.
TRUSTEE / The entity named as trustee or indenture trustee in the related
INDENTURE prospectus supplement.
TRUSTEE
RELEVANT DATES
CUT-OFF DATE The date specified in the related prospectus supplement.
CLOSING DATE The date when the certificates and/or notes of any series are
initially issued as specified in the related prospectus
supplement.
DISTRIBUTION The monthly, quarterly or other periodic date specified in the
DATE related prospectus supplement on which distributions will be
made to holders of the certificates and/or notes.
STATISTICAL The calendar day, if applicable, specified in the related
CALCULATION prospectus supplement.
DATE
---------------------
DESCRIPTION OF SECURITIES
Each series of certificates will be issued pursuant to a pooling and
servicing agreement and will include one or more classes representing an
ownership interest in a segregated pool of mortgage loans, unsecured home
improvement loans and/or manufactured housing installment sales contracts
- --------------------------------------------------------------------------------
6
and other assets of the trust fund. If a series of securities includes notes,
such notes will represent debt obligations of the related trust fund formed
pursuant to a deposit trust agreement and will be secured by the assets of the
trust fund pursuant to an indenture. A class of securities will be entitled, to
the extent of funds available, to one of the following:
o principal and interest distributions;
o principal distributions, with no interest distributions;
o interest distributions, with no principal distributions; or
o such other distributions as are described in the applicable prospectus
supplement.
See "Description of the Securities" in this prospectus.
INTEREST DISTRIBUTIONS
With respect to each series of securities, interest on each class of
securities (other than a class of securities entitled to receive only
principal) will accrue during each period specified in the prospectus
supplement and will be distributed to the holders of the related classes of
securities on each distribution date in accordance with the particular terms of
each such class of securities. The terms of each such class of securities will
be described in the related prospectus supplement.
See "Description of the Securities -- Distributions of Interest on the
Securities" in this prospectus.
PRINCIPAL DISTRIBUTIONS
With respect to each series of securities, principal payments (including
prepayments) on the related mortgage loans, unsecured home improvement loans
and/or manufactured housing installment sales contracts will be distributed to
holders of the related securities or otherwise applied as described in the
related prospectus supplement on each distribution date. Distributions in
reduction of principal balance will be allocated among the classes of
securities of a series in the manner specified in the applicable prospectus
supplement.
See "Description of the Securities -- Distribution of Principal on the
Securities" in this prospectus.
DENOMINATIONS
Each class of securities of a series will be issued in the minimum
denominations set forth in the related prospectus supplement.
REGISTRATION OF THE SECURITIES
The securities will be issued either:
o in book-entry form initially held through DTC in the United States, or
Clearstream Banking or the Euroclear System, in Europe; or
o in fully registered, certificated form.
See "Description of the Securities -- General" and "-- Book-Entry
Registration and Definitive Securities" in this prospectus.
ASSETS OF THE TRUST
The trust related to each series will consist primarily of any of the
following assets:
o a segregated pool of single family and/or multifamily mortgage loans,
which may include sub-prime mortgage loans;
- --------------------------------------------------------------------------------
7
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o home improvement installment sales contracts or installment loans that
are unsecured;
o manufactured housing installment sales contracts and installment loan
agreements; and
o certain other property.
You should refer to the applicable prospectus supplement for the precise
characteristics or expected characteristics of the assets and a description of
the other property, if any, included in a particular trust.
See "Description of the Trust Funds" in this prospectus.
OPTIONAL TERMINATION OF THE TRUST
The related prospectus supplement may provide that the party specified in
the related prospectus supplement may
o repurchase all of the assets in the trust fund and thereby cause early
retirement of the securities under the circumstances and in the manner
specified in the related prospectus supplement and
o repurchase a portion of such assets to retire specified class or classes
of securities under the circumstances and in the manner specified in the
related prospectus supplement.
See "Description of the Securities -- Termination" in this prospectus.
The yield on each class of securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments) on
the assets in the related trust and the timing of receipt of such payments.
See "Yield Considerations" in this prospectus.
PREFUNDING ACCOUNT
The related prospectus supplement may provide that the depositor deposit a
specified amount in a pre-funding account on the date the securities are
issued. In this case, the deposited funds may only be used to acquire the
additional assets for the trust during a set period after the initial issuance
of the securities. Any amounts remaining in the account at the end of the
period will be distributed as a prepayment of principal to the holders of the
related securities.
See "Description of the Trust Funds -- Prefunding Account" in this
prospectus.
CREDIT ENHANCEMENT
If so specified in the applicable prospectus supplement, the securities of
any series, or any one or more classes of a series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
o letter of credit
o special hazard insurance policy
o reserve fund
o cash collateral account
o financial guaranty insurance policy
o mortgage pool insurance policy
o spread account
o overcollateralization
Credit support may also be provided by subordination. Any credit support
will be described in detail in the applicable prospectus supplement.
See "Description of Credit Support" in this prospectus.
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8
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RATINGS OF SECURITIES
The securities of any series will not be offered pursuant to this
prospectus and a prospectus supplement unless each offered security is rated in
one of the four highest rating categories by at least one nationally recognized
statistical rating agency.
o A security rating is not a recommendation to buy, sell or hold the
securities on any series and is subject to revision or withdrawal at any
time by the assigning rating agency.
o Ratings do not address credit risk and do not represent any assessment
of the likelihood or rate of principal prepayments.
See "Risk Factors -- Risks Associated with the Securities -- Ratings
Assigned to the Securities Will Have Limitations" and "Ratings" in this
prospectus.
TAX STATUS OF THE SECURITIES
The securities of each series offered will be either:
o regular interests and residual interests in a trust fund treated as a
REMIC;
o interests in a trust fund treated as a grantor trust;
o interests in a trust fund treated as a partnership;
o debt obligations secured by assets of a trust fund; or
o regular interest or ownership interests in a trust fund treated as a
FASIT.
For additional information see "Federal Income Tax Consequences" in this
prospectus and "Certain Material Federal Income Tax Consequences" in the
prospectus supplement.
ERISA CONSIDERATIONS
If you are a fiduciary of any employee benefit plan or arrangement,
including an individual retirement account, subject to fiduciary responsibility
or prohibited transaction provisions of ERISA, you should carefully review with
your legal advisors whether the purchase or holding of securities could give
rise to a transaction that is prohibited or not otherwise permissible under
ERISA or other comparable rules or regulations.
For additional information see "ERISA Considerations" in this prospectus
and in the prospectus supplement.
LEGAL INVESTMENT
The applicable prospectus supplement will specify whether the class or
classes of securities offered will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended.
If your investment authority is subject to legal restrictions you should
consult your own legal advisors to determine whether and to what extent such
securities constitute a legal investment for you.
For additional information see "Legal Investment" in this prospectus and
in the prospectus supplement.
MATERIAL RISKS
You are urged to read "Risk Factors" in this prospectus and in the
prospectus supplement for a discussion of the material risks associated with an
investment in the securities.
- --------------------------------------------------------------------------------
9
RISK FACTORS
You should consider, among other things, the following factors in
connection with the purchase of securities.
RISKS ASSOCIATED WITH THE SECURITIES
Securities May Not be Liquid. The liquidity of your securities may be
limited. You should consider that:
o a secondary market for the securities of any series may not develop, or
if it does, it may not provide you with liquidity of investment, or it
may not continue for the life of the securities of any series;
o issuance of any of the securities of any series in book-entry form may
reduce the liquidity of such securities in the secondary trading market
because investors may not be willing to purchase securities for which
they cannot obtain physical certificates or notes; and
o unless specified in the applicable prospectus supplement, the securities
will not be listed on any securities exchange.
The Depositor, the Master Servicer, the Servicer, the Trustee and, if
applicable, the Certificate Administrator Will Have Limited Obligations. No
class of securities of any series will be an interest in or obligation of the
depositor, the master servicer, the servicer, the trustee, the certificate
administrator (if applicable) or any of their affiliates. Unless otherwise
provided in the related prospectus supplement, the only obligations with
respect to any of the securities or the related assets will be:
o the servicer's and master servicer's servicing obligations under the
applicable agreement; and
o the obligation of the party making representations and warranties
regarding the assets of a trust, the seller of the assets of a trust,
either directly or indirectly, to the depositor or other entity specified
in the related prospectus supplement to purchase, or substitute a
substantially similar asset for any asset as to which there is defective
documentation or a breach of certain representations and warranties made
with respect to such asset.
Unless otherwise provided in the prospectus supplement, the securities and
the underlying assets will not be guaranteed or insured by any governmental
agency or instrumentality, or by the depositor, the master servicer, the
servicer, the trustee or any of their affiliates.
Credit Enhancement is Limited in Amount and Coverage. With respect to each
series of securities, credit enhancement may be provided in limited amounts to
cover certain types of losses on the underlying assets. Credit enhancement will
be provided in one or more of the forms referred to in this prospectus,
including, but not limited to: subordination of other classes of securities of
the same series; a letter of credit; a financial guaranty insurance policy; a
mortgage pool insurance policy; a special hazard insurance policy; a reserve
fund; a spread account; a cash collateral account; or other type of credit
enhancement. See "Description of Credit Support" in this prospectus.
Regardless of the form of credit enhancement provided:
o the amount of coverage will be limited in amount and in most cases will
be subject to periodic reduction in accordance with a schedule or
formula;
o may provide only very limited coverage as to certain types of losses,
and may provide no coverage as to certain types of losses; and
o all or a portion of the credit enhancement for any series of securities
may be permitted to be reduced, terminated or substituted for, if each
applicable rating agency indicates that the then-current ratings will not
be adversely affected.
Rate of Prepayment on Assets May Adversely Affect Average Lives and Yields
on the Securities. The yield on the securities of each series will depend in
part on the rate of principal payment on the
10
assets (including prepayments, liquidations due to defaults and asset
repurchases). Such yield may be adversely affected, depending upon whether a
particular security is purchased at a premium or a discount, by a higher or
lower than anticipated rate of prepayments on the related assets. In
particular:
o the yield on principal-only or interest-only securities will be
extremely sensitive to the rate of prepayments on the related assets; and
o the yield on certain classes of securities may be relatively more
sensitive to the rate of prepayments of specified assets than other
classes of securities.
The rate of prepayments on assets is influenced by a number of factors,
including:
o the prevailing mortgage market interest rates;
o local and national economic conditions;
o homeowner mobility; and
o the ability of the borrower to obtain financing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
servicing fees or other mechanisms specified in the applicable prospectus
supplement. Your yield also will be adversely affected if losses on the assets
in the related trust are allocated to your securities and may be adversely
affected to the extent of unadvanced delinquencies on the assets in the related
trust. Classes of securities identified in the applicable prospectus supplement
as subordinated certificates or notes are more likely to be affected by
delinquencies and losses than other classes of securities.
See "Yield Considerations" in this prospectus.
Ratings Assigned to the Securities Will Have Limitations. The ratings
assigned to your securities will not:
o assess the likelihood that principal prepayments (including those caused
by defaults) on the related assets will be made, the degree to which the
rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination or redemption of the series
of securities; and
o address the possibility that prepayments at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a security at a
significant premium might fail to recoup its initial investment under
certain prepayment scenarios.
In addition, the ratings of any series of securities by any applicable
rating agency may be lowered following the initial issuance of the securities.
The lowering of a rating on a series or class of securities may adversely
affect the market value of such securities and the liquidity of such
securities. The depositor or any of its affiliates will not have any obligation
to maintain any rating of any series of securities.
Book-Entry Securities May Experience Certain Problems. Since transactions
in the classes of securities of a Series issued in book-entry form can be
effected only through DTC, Clearstream Banking, the Euroclear System,
participating organizations, indirect participants and certain banks:
o you may experience delays in your receipts of payments of interest and
principal; and
o your ability to pledge such securities to persons or entities that do
not participate in the DTC, Clearstream
Banking or the Euroclear System may be limited due to the lack of a
physical certificate.
See "Description of the Securities -- Book-Entry Registration and
Definitive Securities" in this prospectus.
11
Risk of Loss May Be Greater on Subordinated Securities. The rights of
holders of subordinated securities will be subordinate:
o to the rights of the servicer and any master servicer (to the extent of
their servicing fees, including any unpaid servicing fees with respect to
one or more prior due periods, and its reimbursement for certain
unreimbursed advances and unreimbursed liquidation expenses); and
o the holders of senior securities to the extent described in the related
prospectus supplement.
As a result of the foregoing, investors must be prepared to bear the risk
that they may be subject to delays in payment and may not recover their initial
investments in the subordinated securities. See "Description of Credit Support"
in this prospectus.
The yields on the subordinated securities may be extremely sensitive to
the loss experience of the related assets and the timing of any such losses. If
the actual rate and amount of losses experienced by the assets exceed the rate
and amount of such losses assumed by an investor, the yield to maturity on the
subordinated securities may be lower than anticipated.
RISKS ASSOCIATED WITH THE ASSETS
Mortgage Loans Secured by Multifamily Properties May Experience Greater
Rates of Delinquency and Foreclosure. The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property typically is directly related to the net operating
income derived from such property. If the net operating income of the property
is reduced (for example, if rental or occupancy rates decline or real estate
tax rates or other operating expenses increase), the borrower's ability to
repay the loan may be impaired. In addition, the concentration of default,
foreclosure and loss risk for a pool of mortgage loans secured by multifamily
properties may be greater than for a pool of mortgage loans secured by single
family properties of comparable aggregate unpaid principal balance because the
pool of mortgage loans secured by multifamily properties is likely to consist
of a smaller number of higher balance loans.
General Economic Conditions Affect Mortgage Loan Performance. General
economic conditions have an impact on the ability of borrowers to repay
mortgage loans. Loss of earnings, illness and other similar factors may lead to
an increase in delinquencies and bankruptcy filings by borrowers. In the event
of personal bankruptcy of a borrower under a mortgage loan, it is possible that
the holders of the related securities could experience a loss with respect to
such mortgagor's mortgage loan. In conjunction with a mortgagor's bankruptcy, a
bankruptcy court may suspend or reduce the payments of principal and interest
to be paid with respect to such mortgage loan, thus delaying the amount
received by the holders of the related securities with respect to such mortgage
loan. Moreover, if a bankruptcy court prevents the transfer of the related
mortgaged property to the related trust, any remaining balance on such mortgage
loan may not be recoverable.
Real Estate Market Conditions Affect Mortgage Loan Performance. An
investment in the securities which are secured by or represent interests in
mortgage loans may be affected by, among other things, a decline in real estate
values. There is no assurance that the values of the mortgaged properties will
remain at the levels existing on the dates of origination of the related
mortgage loans.
If the residential real estate market should experience an overall decline
in property values such that the outstanding balances of the mortgage loans
contained in a particular trust and any secondary financing on the mortgaged
properties, become equal to or greater than the value of the mortgaged
properties, delinquencies, foreclosures and losses could be higher than those
now generally experienced in the mortgage lending industry.
Geographic Concentration May Increase Rates of Loss and
Delinquency. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions
12
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on assets generally. Any concentration of the assets relating
to any series of securities in such a region may present risk considerations in
addition to those generally present for similar asset-backed securities without
such concentration.
See "The Mortgage Pool" in the related prospectus supplement for further
information regarding the geographic concentration of the assets underlying the
securities of any series.
Risk of Loss May Be Greater on Junior Mortgage Loans. Certain of the
mortgage loans underlying the securities of a series may be secured by
mortgages junior or subordinate to one or more other mortgages, and the related
more senior mortgages may not be included in the trust fund. Although little
data is available, the rate of default of second or more junior mortgage loans
may be greater than that of mortgage loans secured by senior liens on
comparable properties. A primary risk to holders of mortgage loans secured by
junior mortgages is the possibility that adequate funds will not be received in
connection with a foreclosure of the related senior mortgage to satisfy fully
both the senior mortgage and the mortgage that is junior or subordinate. In
such case, holders of the securities would bear:
o the risk of delay in distributions while a deficiency judgement against
the borrower is obtained; and
o the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain
jurisdictions. In addition, a junior mortgagee may not foreclose on the
property securing a junior mortgage unless it forecloses subject to the more
senior mortgage.
In servicing junior mortgages, it is generally the servicer's and master
servicer's practice to advance funds to keep the senior mortgage current if the
mortgagor is in default thereunder. The servicer and master servicer intend to
advance such amounts in accordance with their normal servicing procedures, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that mortgage loan or otherwise. Such
practice may not be followed in servicing loans more junior than second
mortgages or may be modified at any time. The related trust will have no source
of funds to satisfy any senior mortgage or make payments due to any senior
mortgagee. The junior mortgages securing the mortgage loans are subject and
subordinate to any senior mortgage affecting the related mortgaged property,
including limitations and prohibitions which may be contained in such senior
mortgage upon subordinate financing.
Special Risks of Certain Assets. Certain assets that may be included in
the Trust may involve additional uncertainties not present in other types of
assets. Certain of the assets may provide for escalating or variable payments
that may be larger than the initial payment amount; however, the borrowers
under such assets are generally approved on the basis of the initial payment
amount and the borrower's income may not be sufficient to enable them to pay
the increased payment amounts. Therefore, in such cases the likelihood of
default may increase.
Certain of the assets underlying a series of securities may be delinquent
in respect of the payment of principal and interest. In addition, certain of
the mortgagors under the mortgage loans underlying a series of securities may
be subject to personal bankruptcy proceedings. Credit enhancement provided with
respect to a particular series of securities may not cover all losses related
to such mortgage loans. Prospective investors should consider the risk that the
inclusion in a trust of delinquent assets and mortgage loans with respect to
which the mortgagor is the subject of bankruptcy proceedings may cause the rate
of the defaults and prepayments on such assets to increase and, in turn, may
cause losses to exceed the available credit enhancement for such series and
affect the yield on the securities of such series. See "The Mortgage Pool" in
the related prospectus supplement.
Defaulted Mortgage Loans May Experience Delays in Liquidation. Even
assuming the mortgaged properties provide adequate security for the mortgage
loans underlying a series of securities, substantial delays could result in
connection with the liquidation of defaulted mortgage loans. This
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could result in corresponding delays in the receipt of the related proceeds by
the related trust. See "Certain Legal Aspects of the Mortgage Loans --
Foreclosure," "-- Rights of Redemption" and
"-- Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations on
Lenders" in this prospectus.
Liquidation Expenses May be Disproportionate. Liquidation expenses with
respect to defaulted assets do not vary directly with the outstanding principal
balance of the assets at the time of default. Therefore, assuming that the
servicer and master servicer took the same steps in realizing upon a defaulted
asset having a small remaining principal balance as they would in the case of a
defaulted asset having a large remaining principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the small asset than would be the case with
the defaulted asset having a large remaining principal balance. Because the
average outstanding principal balance of the assets is small relative to the
size of the average outstanding principal balance of the loans in a typical
pool consisting only of conventional purchase-money mortgage loans, net
liquidation proceeds on liquidated assets may also be smaller as a percentage
of the principal balance of the assets than would be the case in a typical pool
consisting only of conventional purchase-money mortgage loans.
Defaults May Be More Likely on Newer Assets. Certain of the assets
underlying a series of securities may be recently originated as of the date of
the inclusion in the related trust fund. Although little data is available,
defaults on assets are generally expected to occur with greater frequency in
their early years.
Balloon Payment Assets May Have a Greater Default Risk at
Maturity. Certain of the underlying a series of securities may provide for a
lump-sum payment of the unamortized principal balance of the mortgage loan at
the maturity of the asset. See "The Mortgage Pool" in the related prospectus
supplement.
Because borrowers under this type of asset are required to make a
relatively large single payment upon maturity, it is possible that the default
risk associated with such assets is greater than that associated with
fully-amortizing mortgage loans. The ability of a mortgagor on this type of
asset to repay the mortgage loan upon maturity frequently depends upon the
mortgagor's ability:
o to refinance the asset, which will be affected by a number of factors,
including, without limitation, the level of mortgage rates available in
the primary mortgage market at the time, the mortgagor's equity in the
related mortgaged property, the financial condition of the mortgagor, the
condition of the mortgaged property, tax law, general economic conditions
and the general willingness of financial institutions and primary
mortgage bankers to extend credit; or
o to sell the related mortgaged property at a price sufficient to permit
the mortgagor to make the lump-sum payment.
Texas Home Equity Loans Have Significant Limitations. Certain of the
mortgage loans may be home equity loans secured by mortgaged properties located
in Texas. The Texas Constitution permits this type of loan, but significant
limitations were imposed on permitted terms, conditions and practices incident
to their creation. For example, these loans must be made without recourse for
personal liability against the homestead owner(s) or their spouse(s) (except in
the case of actual fraud on their part in obtaining the loan) and may be
foreclosed upon only by court order. Further, holders of these types of loans
face unique legal risks and uncertainties that they do not customarily confront
with equity take-out mortgages in other states. For example, if any of the
requirements that are addressed in the amendment to the Texas Constitution
(such as limitations on fees charged to the borrower, disclosures to the
borrower or matters to be provided for in the closing documents) are not met,
the lien may be invalid. There are also similar risks involved in servicing
these types of loans, such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower, that can result in the forfeiture of all principal and interest due
on the mortgage loan.
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Increased Risk of Loss if Assets are Delinquent. A portion of the assets
may be delinquent upon the issuance of the related securities. Credit
enhancement provided with respect to a particular series of securities may not
cover all losses related thereto. You should consider the risk that the
inclusion of such assets in the trust fund for a series may cause the rate of
defaults and prepayments on the assets to increase and, in turn, may cause
losses to exceed the available credit enhancement for such series and affect
the yield on the securities of such series.
Cash Flow Agreements are Subject to Counterparty Risk. The assets of a
trust fund may, if specified in the related prospectus supplement, include
agreements such as interest rate exchange agreements, interest rate cap or
floor agreements, currency exchange agreements or other similar agreements,
which will require the provider of such instrument or counterparty to make
payments to the trust fund under the circumstances described in the prospectus
supplement. To the extent that payments on the securities of the related series
depend in part on payments to be received under this type of agreement, the
ability of the trust fund to make payments on the securities will be subject to
the credit risk of the counterparty. The prospectus supplement for a series of
securities will describe any mechanism, such as the payment of any "breakage
fee," which may exist to facilitate the replacement of this type of agreement
upon the default of credit impairment of the related counterparty. However,
there can be no assurance that any such mechanism will result in the ability of
the servicer to obtain a replacement.
Sub-Prime Mortgage Loans May Experience Greater Rates of Delinquency and
Foreclosure. If specified in the related prospectus supplement, all or a
portion of the mortgage loans may consist of sub-prime mortgage loans. A
sub-prime mortgage loan is a mortgage loan that is ineligible for purchase by
Fannie Mae or the Freddie Mac due to borrower credit characteristics, property
characteristics, loan documentation guidelines or other credit characteristics
that do not meet Fannie Mae or Freddie Mac underwriting guidelines. As a
consequence:
o delinquencies and foreclosures may be expected to be more likely with
respect to sub-prime mortgage loans than with respect to mortgage loans
originated in accordance with Fannie Mae or Freddie Mac underwriting
guidelines; and
o changes in the values of the mortgaged properties may have a greater
effect on the loss experience of sub-prime mortgage loans than on
mortgage loans originated in accordance with Fannie Mae or Freddie Mac
underwriting guidelines.
VIOLATIONS OF FEDERAL LAWS OR STATE LAWS MAY ADVERSELY AFFECT ABILITY TO
COLLECT ON LOANS OR RESULT IN LOSSES
There are various federal and state laws, public policies and principles
of equity that protect consumers. Among other things, these laws, policies and
principles:
o regulate interest rate and other charges;
o require certain disclosures;
o require licensing of mortgage loan originators;
o require the lender to provide credit counseling and/or make certain
affirmative determinations regarding the borrower's ability to replay the
mortgage loan;
o prohibit discriminatory lending practices;
o limit or prohibit certain mortgage loan features, such as prepayment
penalties or balloon payments;
o regulate the use of consumer credit information; and
o regulate debt collection practices.
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Violation of certain provisions of these laws, policies and principles:
o may limit a servicer's ability to collect all or part of the principal
of or interest on the mortgage loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject a servicer or the trust to damages and administrative
sanctions.
The seller of the assets, either directly or indirectly, to the depositor
will generally be required to repurchase any mortgage loan which, at the time
of origination, did not comply with such federal and state laws or regulations,
however that remedy may not be adequate to fully compensate the related trust
fund.
See "Certain Legal Aspects of the Mortgage Loans" in this prospectus.
In addition, certain of the mortgage loans secured by mortgaged properties
located in Texas may be subject to the provisions of Texas laws which regulate
loans other than purchase money loans. These laws provide for certain
disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure to comply with any requirement may
render the mortgage loan unenforceable and/or the lien on the mortgaged
property invalid. There are also similar risks involved in servicing such
mortgage loans (such as the failure to comply with an obligation to the
borrower within a reasonable time after receiving notification from the
borrower) that can result in the forfeiture of all principal and interest due
on the mortgage loan.
See "Certain Legal Aspects of the Mortgage Loans-Anti -- Deficiency
Legislation, the Bankruptcy Code and Other Limitations on Lenders," "-- Texas
Home Equity Loans" and "-- Homeowners Protection Act of 1998."
MARKET VALUES OF MANUFACTURED HOMES MAY INCREASE THE RISK OF LOSS
Manufactured homes generally depreciate in value. Thus investors should
expect that, as a general matter, the market value of any manufactured home
will be lower than the outstanding principal balance of the related installment
contract. As a result, investors must be prepared to bear the risk of loss
resulting from any delinquency or liquidation loss on the contracts in a trust
fund. See "Description of Credit Support" in this prospectus.
RISK OF LOSS MAY BE GREATER ON UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any unsecured home improvement loan
included in a trust fund will not be secured by an interest in the related real
estate or any other property. In the event of a default, the trust fund will
have recourse only against the borrower's assets generally, along with all
other general unsecured creditors of the borrower. In a bankruptcy or
insolvency proceeding, the obligations of the borrower under an unsecured home
improvement loan may be discharged in their entirety. As a result, the trust
fund may suffer losses. In addition, a borrower on an unsecured home
improvement loan may not demonstrate the same degree of concern over
performance of the borrower's obligations as if such obligations were secured
by the real estate or other assets owned by such borrower.
RISKS OF LOSS MAY INCREASE DUE TO DEFECTIVE SECURITY INTEREST AND EFFECTS OF
CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The seller of the assets, either directly or indirectly, to the depositor
will represent that a contract is secured by a security interest in a
manufactured home. Perfection of such security interests and the right to
realize upon the value of the manufactured homes as collateral for the
contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code. The steps necessary to perfect the security interest
in a manufactured home will vary from state to state. Because of the expense
and administrative inconvenience involved, the servicer or the master servicer
will not amend
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any certificates of title to change the lienholder specified therein from the
asset seller to the trustee and will not deliver any certificate of title to
the trustee or note thereon the trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the trustee of
the security interest in the manufactured home may not be effective or such
security interest may not be perfected and, may not be effective against
creditors of the asset seller or a trustee in bankruptcy of the asset seller.
In addition, numerous federal and state consumer protection laws impose
requirements on lending under installment sales contracts and installment loan
agreements and the failure by the lender or seller of goods to comply with such
requirements could give rise to liabilities of assignees for amounts due under
such agreements and claims by such assignees may be subject to set-off as a
result of such lender's or seller's noncompliance. These laws would apply to
the trustee as assignee of the contracts. The asset seller of the contracts
will warrant that each contract complies with all requirements of law and will
make certain warranties relating to the validity, subsistence, perfection and
priority of the security interest in each manufactured home securing a
contract. A breach of any such warranty that materially adversely affects any
contract would create an obligation of the asset seller to repurchase, or if
permitted by the applicable agreement, substitute for, such contract unless
such breach is cured. If the credit support is exhausted and recovery of
amounts due on the contracts is dependent on repossession and resale of
manufactured homes securing contracts that are in default, certain other
factors may limit the ability to realize upon the manufactured home or may
limit the amount realized by securityholders to less than the amount due. See
"Certain Legal Aspects of the Contracts."
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the "ASSETS") will include (i)
single family and/or multifamily mortgage loans, which may include sub-prime
mortgage loans (or certain balances thereof) (collectively, the "MORTGAGE
LOANS"), including without limitation, First Lien Mortgage Loans, Home Equity
Loans, Home Improvement Contracts and Land Sale Contracts, (ii) unsecured home
improvement loans ("UNSECURED HOME IMPROVEMENT LOANS"), (iii) manufactured
housing installment sale contracts or installment loan agreements (the
"CONTRACTS"), or (iv) a combination of Mortgage Loans, Unsecured Home
Improvement Loans and/or Contracts. The Mortgage Loans will not be guaranteed
or insured by the Depositor or any of its affiliates. The Mortgage Loans will
be guaranteed or insured by a governmental agency or instrumentality or other
person only if and to the extent expressly provided in the related prospectus
supplement. Each Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or indirectly, from a
prior holder thereof (an "ASSET SELLER"), which may be an affiliate of the
Depositor and which prior holder may or may not be the originator of such
Mortgage Loan, Unsecured Home Improvement Loan or Contract.
The Assets included in the Trust Fund for a Series may be subject to
various types of payment provisions. Such Assets may consist of:
o "LEVEL PAYMENT ASSETS," which may provide for the payment of interest
and full repayment of principal in level monthly payments with a fixed
rate of interest computed on their declining principal balances;
o "ADJUSTABLE RATE ASSETS," which may provide for periodic adjustments to
their rates of interest to equal the sum (which may be rounded) of a
fixed margin and an index;
o "BUY DOWN ASSETS," which are Assets for which funds have been provided
by someone other than the related obligors to reduce the obligors'
monthly payments during the early period after origination of such
Assets;
o "INCREASING PAYMENT ASSETS," as described below;
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o "INTEREST REDUCTION ASSETS," which provide for the one-time reduction of
the interest rate payable thereon;
o "GEM ASSETS," which provide for (a) monthly payments during the first
year after origination that are at least sufficient to pay interest due
thereon, and (b) an increase in such monthly payments in subsequent years
at a predetermined rate resulting in full repayment over a shorter term
than the initial amortization terms of such Assets;
o "GPM ASSETS," which allow for payments during a portion of their terms
which are or may be less than the amount of interest due on the unpaid
principal balances thereof, and which unpaid interest will be added to
the principal balances of such Assets and will be paid, together with
interest thereon, in later years;
o "STEP-UP RATE ASSETS" which provide for interest rates that increase
over time;
o "BALLOON PAYMENT ASSETS" which are mortgage loans that are not fully
amortizing over their terms and, thus, will require a lump-sum payment at
their stated maturity;
o "INTEREST-ONLY ASSETS" which provide for the payment of interest at the
related interest rate, but no payment of principal, for a certain period
of time following the origination of the asset;
o "ADDITIONAL COLLATERAL ASSETS" which are assets that are either (i)
secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party
guarantee (usually a parent of the borrower) which is in turn secured by
a security interest in collateral (usually securities) owned by such
guarantor;
o "CONVERTIBLE ASSETS" Which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to certain limitations, the related
obligors may exercise an option to convert the adjustable interest rate
to a fixed interest rate; and
o "BI-WEEKLY ASSETS," which provide for obligor payments to be made on a
bi-weekly basis.
An "INCREASING PAYMENT ASSET" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the related
prospectus supplement and which increase thereafter (at a predetermined rate
expressed as a percentage of the monthly payment during the preceding payment
period, subject to any caps on the amount of any single monthly payment
increase) for a period to be specified in the related prospectus supplement
from the date of origination, after which the monthly payment is fixed at a
level-payment amount so as to fully amortize the Asset over its remaining term
to maturity. The scheduled monthly payment with respect to an Increasing
Payment Asset is the total amount required to be paid each month in accordance
with its terms and equals the sum of (1) the obligor's monthly payments
referred to in the preceding sentence and (2) in the case of certain Increasing
Payment Assets, payments made by the respective Servicers pursuant to buy-down
or subsidy agreements. The obligor's initial monthly payments for each
Increasing Payment Asset are set at the level-payment amount that would apply
to an otherwise identical Level Payment Asset having an interest rate a certain
number of percentage points below the Asset Rate of such Increasing Payment
Asset. The obligor's monthly payments on each Increasing Payment Asset,
together with any payments made thereon by the related Servicers pursuant to
buy-down or subsidy agreements, will in all cases be sufficient to allow
payment of accrued interest on such Increasing Payment Asset at the related
interest rate, without negative amortization. An obligor's monthly payments on
such an Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may
be increased.
The Securities will be entitled to payment only from the assets of the
related Trust Fund and will not be entitled to payments in respect of the
assets of any other trust fund established by the Depositor. If specified in
the related prospectus supplement, the assets of a Trust Fund will consist of
certificates representing beneficial ownership interests in, or indebtedness
of, another trust fund that contains the Assets.
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MORTGAGE LOANS
General
Each Mortgage Loan will generally be secured by a lien on (i) a one-to
four-family residential property or a security interest in shares issued by a
cooperative housing corporation (a "SINGLE FAMILY PROPERTY" and the related
Mortgage Loan a "SINGLE FAMILY MORTGAGE LOAN") or (ii) a primarily residential
property which consists of five or more residential dwelling units, and which
may include limited retail, office or other commercial space (a "MULTIFAMILY
PROPERTY" and the related Mortgage Loan a "MULTIFAMILY MORTGAGE LOAN"). Single
Family Properties and Multifamily Properties are sometimes referred to herein
collectively as "Mortgaged Properties." To the extent specified in the related
prospectus supplement, the Mortgage Loans will be secured by first and/or
junior mortgages or deeds of trust or other similar security instruments
creating a first or junior lien on Mortgaged Property. The Mortgaged Properties
may include apartments owned by cooperative housing corporations
("COOPERATIVES"). The Mortgaged Properties may include leasehold interests in
properties, the title to which is held by third party lessors. The term of any
such leasehold shall exceed the term of the related mortgage note by at least
five years or such other time period specified in the related prospectus
supplement. The Mortgage Loans may include (i) fixed or adjustable rate
conventional mortgage loans which are secured by a first lien on one- to
four-family residential property ("FIRST LIEN MORTGAGE LOANS"), (ii) closed-end
and/or revolving home equity loans or certain balances thereof secured by first
liens or junior liens on one- to four- family residential property ("HOME
EQUITY LOANS") and/or (iii) secured home improvement installment sales
contracts and secured installment loan agreements ("HOME IMPROVEMENT
CONTRACTS"). In addition, the Mortgage Loans may include certain Mortgage Loans
evidenced by contracts ("LAND SALE CONTRACTS") for the sale of properties
pursuant to which the mortgagor promises to pay the amount due thereon to the
holder thereof with fee title to the related property held by such holder until
the mortgagor has made all of the payments required pursuant to such Land Sale
Contract, at which time fee title is conveyed to the mortgagor. The Originator
of each Mortgage Loan will have been a person other than the Depositor. The
related prospectus supplement will indicate if any person who originated the
Mortgage Loans (each an "ORIGINATOR") is an affiliate of the Depositor. The
Mortgage Loans will be evidenced by promissory notes (the "MORTGAGE NOTES")
secured by mortgages, deeds of trust or other security instruments (the
"MORTGAGES") creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any given time is the
ratio (expressed as a percentage) of the then outstanding principal balance of
the Mortgage Loan to the Value of the related Mortgaged Property. The "VALUE"
of a Mortgaged Property, other than with respect to Refinance Loans, is
generally the lesser of (a) the appraised value determined in an appraisal
obtained by the originator at origination of such loan and (b) the sales price
for such property. "REFINANCE LOANS" are loans made to refinance existing
loans. Unless otherwise set forth in the related prospectus supplement, the
Value of the Mortgaged Property securing a Refinance Loan is the appraised
value thereof determined in an appraisal obtained at the time of origination of
the Refinance Loan. The value of a Mortgaged Property as of the date of initial
issuance of the related Series of Securities may be less than the Value at
origination and will fluctuate from time to time based upon changes in economic
conditions and the real estate market.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Mortgage Loans as of the
applicable cut-off date (the "CUT-OFF DATE") specified in the prospectus
supplement,
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o the type of property securing the Mortgage Loans,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans,
o the earliest and latest origination date and maturity date of the
Mortgage Loans,
o the range of the Loan-to-Value Ratios at origination of the Mortgage
Loans,
o the Mortgage Rates or range of Mortgage Rates and the weighted average
Mortgage Rate borne by the Mortgage Loans,
o the state or states in which most of the Mortgaged Properties are
located,
o information with respect to the prepayment provisions, if any, of the
Mortgage Loans,
o with respect to Mortgage Loans with adjustable Mortgage Rates ("ARM
LOANS"), the index, the frequency of the adjustment dates, the range of
margins added to the index, and the maximum Mortgage Rate or monthly
payment variation at the time of any adjustment thereof and over the life
of the ARM Loan,
o information regarding the payment characteristics of the Mortgage Loans,
including without limitation balloon payment and other amortization
provisions,
o the number of Mortgage Loans that are delinquent and the number of days
or ranges of the number of days such Mortgage Loans are delinquent and
o the material underwriting standards used for the Mortgage Loans.
If specific information respecting the Mortgage Loans is not known to the
Depositor at the time Securities are initially offered, more general
information of the nature described above will be provided in the prospectus
supplement, and specific information will be set forth in a report which will
be available to purchasers of the related Securities at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Securities and Exchange Commission (the "SEC") after such initial issuance.
Notwithstanding the foregoing, the characteristics of the Mortgage Loans
included in a Trust Fund will not vary by more than five percent (by aggregate
principal balance as of the Cut-off Date) from the characteristics thereof that
are described in the related prospectus supplement.
The related prospectus supplement will specify whether the Mortgage Loans
include (i) First Lien Mortgage Loans, (ii) Home Equity Loans, which may be
secured by Mortgages that are junior to other liens on the related Mortgaged
Property and/or (iii) Home Improvement Contracts originated by a home
improvement contractor and secured by a Mortgage on the related Mortgaged
Property that is junior to other liens on the Mortgaged Property. The home
improvements purchased with the Home Improvement Contracts typically include
replacement windows, house siding, roofs, swimming pools, satellite dishes,
kitchen and bathroom remodeling goods, solar heating panels, patios, decks,
room additions and garages. The related prospectus supplement will specify
whether the Home Improvement Contracts are partially insured under Title I of
the National Housing Act of 1934 (the "NATIONAL HOUSING ACT") and, if so, the
limitations on such insurance. In addition, the related prospectus supplement
will specify whether the Mortgage Loans contain certain Mortgage Loans
evidenced by Land Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the Mortgage Loans will provide for payments of principal, interest
or both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related prospectus supplement or for
payments in another manner described in the related prospectus supplement. Each
Mortgage Loan may provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a "MORTGAGE RATE") that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to
a fixed Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed
to an adjustable Mortgage Rate, from time to time pursuant to an
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election or as otherwise specified on the related Mortgage Note, in each case
as described in the related prospectus supplement. Each Mortgage Loan may
provide for scheduled payments to maturity or payments that adjust from time to
time to accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events or that adjust on the basis of other methodologies, and may
provide for negative amortization or accelerated amortization, in each case as
described in the related prospectus supplement. Each Mortgage Loan may be fully
amortizing or require a balloon payment due on its stated maturity date, in
each case as described in the related prospectus supplement. Each Mortgage Loan
may contain prohibitions on prepayment (a "LOCK-OUT PERIOD" and, the date of
expiration thereof, a "LOCK-OUT DATE") or require payment of a premium or a
yield maintenance penalty (a "PREPAYMENT PREMIUM") in connection with a
prepayment, in each case as described in the related prospectus supplement. In
the event that holders of any Class or Classes of Offered Securities will be
entitled to all or a portion of any Prepayment Premiums collected in respect of
Mortgage Loans, the related prospectus supplement will specify the method or
methods by which any such amounts will be allocated. See "-- Assets" above.
REVOLVING CREDIT LINE LOANS
As more fully described in the related prospectus supplement, the Mortgage
Loans may consist, in whole or in part, of revolving Home Equity Loans or
certain balances thereof ("REVOLVING CREDIT LINE LOANS"). Interest on each
Revolving Credit Line Loan, excluding introductory rates offered from time to
time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. From time to time
prior to the expiration of the related draw period specified in a Revolving
Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be
drawn down (up to a maximum amount as set forth in the related prospectus
supplement) or repaid. If specified in the related prospectus supplement, new
draws by borrowers under the Revolving Credit Line Loans will automatically
become part of the Trust Fund described in such prospectus supplement. As a
result, the aggregate balance of the Revolving Credit Line Loans will fluctuate
from day to day as new draws by borrowers are added to the Trust Fund and
principal payments are applied to such balances and such amounts will usually
differ each day, as more specifically described in the related prospectus
supplement. Under certain circumstances, under a Revolving Credit Line Loan, a
borrower may, during the related draw period, choose an interest only payment
option, during which the borrower is obligated to pay only the amount of
interest which accrues on the loan during the billing cycle, and may also elect
to pay all or a portion of the principal. An interest only payment option may
terminate at the end of the related draw period, after which the borrower must
begin paying at least a minimum monthly portion of the average outstanding
principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related prospectus supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in such prospectus supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Unsecured Home
Improvement Loans, including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Unsecured Home
Improvement Loans as of the applicable Cut-Off Date,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Unsecured Home Improvement Loans,
21
o the earliest and latest origination date and maturity date of the
Unsecured Home Improvements Loans,
o the interest rates or range of interest rates and the weighted average
interest rates borne by the Unsecured Home Improvement Loans,
o the state or states in which most of the Unsecured Home Improvement
Loans were originated,
o information with respect to the prepayment provisions, if any, of the
Unsecured Home Improvement Loans,
o with respect to the Unsecured Home Improvement Loans with adjustable
interest rates ("ARM UNSECURED HOME IMPROVEMENT LOANS"), the index, the
frequency of the adjustment dates, the range of margins added to the
index, and the maximum interest rate or monthly payment variation at the
time of any adjustment thereof and over the life of the ARM Unsecured
Home Improvement Loan,
o information regarding the payment characteristics of the Unsecured Home
Improvement Loan,
o the number of Unsecured Home Improvement Loans that are delinquent and
the number of days or ranges of the number of days such Unsecured Home
Improvement Loans are delinquent and
o the material underwriting standards used for the Unsecured Home
Improvement Loans.
If specific information respecting the Unsecured Home Improvement Loans is not
known to the Depositor at the time Securities are initially offered, more
general information of the nature described above will be provided in the
prospectus supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Securities at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the SEC after such initial issuance. Notwithstanding the
foregoing, the characteristics of the Unsecured Home Improvement Loans included
in a Trust Fund will not vary by more than five percent (by aggregate principal
balance as of the Cut-off Date) from the characteristics thereof that are
described in the related prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the related prospectus supplement, each Contract
will be secured by a security interest in a new or used manufactured home
(each, a "MANUFACTURED HOME"). Such prospectus supplement will specify the
states or other jurisdictions in which the Manufactured Homes are located as of
the related Cut-off Date. The method of computing the "LOAN-TO-VALUE RATIO" of
a Contract will be described in the related prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain certain information, as of the
dates specified in such prospectus supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including:
o the aggregate outstanding principal balance and the largest, smallest
and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date,
o whether the Manufactured Homes were new or used as of the origination of
the related Contracts,
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the Contracts,
22
o the earliest and latest origination date and maturity date of the
Contracts,
o the range of the Loan-to-Value Ratios at origination of the Contracts,
o the Contract Rates or range of Contract Rates and the weighted average
Contract Rate borne by the Contracts,
o the state or states in which most of the Manufactured Homes are located
at origination,
o information with respect to the prepayment provisions, if any, of the
Contracts,
o with respect to Contracts with adjustable Contract Rates ("ARM
CONTRACTS"), the index, the frequency of the adjustment dates, and the
maximum Contract Rate or monthly payment variation at the time of any
adjustment thereof and over the life of the ARM Contract,
o the number of Contracts that are delinquent and the number of days or
ranges of the number of days such Contracts are delinquent,
o information regarding the payment characteristics of the Contracts and
o the material underwriting standards used for the Contracts.
If specific information respecting the Contracts is not known to the Depositor
at the time Securities are initially offered, more general information of the
nature described above will be provided in the prospectus supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the SEC after
such initial issuance. Notwithstanding the foregoing, the characteristics of
the Contracts included in a Trust Fund will not vary by more than five percent
(by aggregate principal balance as of the Cut-off Date) from the
characteristics thereof that are described in the related prospectus
supplement.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the Contracts will provide for payments of principal, interest or
both, on due dates that occur monthly or at such other interval as is specified
in the related prospectus supplement or for payments in another manner
described in the prospectus supplement. Each Contract may provide for no
accrual of interest or for accrual of interest thereon at an annual percentage
rate (a "CONTRACT RATE") that is fixed over its term or that adjusts from time
to time, or as otherwise specified in the related prospectus supplement. Each
Contract may provide for scheduled payments to maturity or payments that adjust
from time to time to accommodate changes in the Contract Rate as otherwise
described in the related prospectus supplement. See "-- Assets" above.
PRE-FUNDING ACCOUNT
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Securities may be deposited into an account
maintained with the Trustee (a "PRE-FUNDING ACCOUNT"). In such event, the
Depositor will be obligated (subject only to the availability thereof) to sell
at a predetermined price, and the Trust Fund for the related Series of
Securities will be obligated to purchase (subject to the availability thereof),
additional Assets (the "SUBSEQUENT ASSETS") from time to time (as frequently as
daily) within the period (generally not to exceed three months) specified in
the related prospectus supplement (the "PRE-FUNDING PERIOD") after the issuance
of such Series of Securities having an aggregate principal balance
approximately equal to the amount on deposit in the Pre-Funding Account (the
"PRE-FUNDED AMOUNT") for such Series on the date of such issuance. The
Pre-Funded Amount with respect to a Series is not expected to exceed 25% of the
aggregate initial Security Balance of the related Securities. Any Subsequent
Assets will be required to satisfy certain eligibility criteria more fully set
forth in the applicable Agreement, which eligibility criteria will be
consistent with the eligibility criteria of the Assets initially included in
the Trust Fund, subject to such exceptions as are expressly stated in the
prospectus supplement. For example, the Subsequent Assets will be subject to
the same underwriting standards, representations and warranties as the Assets
23
initially included in the Trust Fund. In addition, certain conditions must be
satisfied before the Subsequent Assets are transferred into the Trust Fund such
as the delivery to the Rating Agencies and the Trustee of certain opinions of
counsel (including bankruptcy, corporate and tax opinions).
Any portion of the Pre-Funded Amount remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be used to prepay one or more Classes
of Securities in the amounts and in the manner specified in the related
prospectus supplement. In addition, if specified in the related prospectus
supplement, the Depositor may be required to deposit cash into an account
maintained by the Trustee (the "CAPITALIZED INTEREST ACCOUNT") for the purpose
of assuring the availability of funds to pay interest with respect to the
Securities during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the related prospectus supplement.
ACCOUNTS
Each Trust Fund will include one or more accounts, established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related prospectus supplement will, to the extent described
herein and in such prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a
non-interest bearing account, and funds held therein may be held as cash or
invested in certain short-term, investment grade obligations, in each case as
described in the related prospectus supplement. See "Description of the
Agreements -- Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements -- Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the related prospectus supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more Classes of Securities in the related
Series in the form of subordination of one or more other Classes of Securities
in such Series or by one or more other types of credit support, such as a
letter of credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any such coverage with respect to the
Securities of any Series, "CREDIT SUPPORT"). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will
be described in the prospectus supplement for a Series of Securities. See "Risk
Factors -- Risks Associated with the Securities -- Credit Enhancement is
Limited in Amount and Coverage" and "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the related prospectus supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related Series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets
or on one or more Classes of Securities. Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Loans were
denominated in a non-United States currency. The principal terms of any such
guaranteed investment contract or other agreement (any such agreement, a "CASH
FLOW AGREEMENT"), including, without limitation, provisions relating to the
timing, manner and amount of payments thereunder and provisions relating to the
termination thereof, will be described in the prospectus supplement for the
related Series. In addition, the related prospectus supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
24
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the repayment of the
financing incurred in such purchase, and to pay for certain expenses incurred
in connection with such purchase of Assets and sale of Securities. The
Depositor expects to sell the Securities from time to time, but the timing and
amount of offerings of Securities will depend on a number of factors, including
the volume of Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
holder of the Security (the "SECURITYHOLDER"), the Pass-Through Rate of the
Security, the receipt and timing of receipt of distributions on the Security
and the weighted average life of the Assets in the related Trust Fund (which
may be affected by prepayments, defaults, liquidations or repurchases). See
"Risk Factors -- Risks Associated with the Securities -- Rate of Prepayment on
Mortgage Loans May Adversely Affect Average Lives and Yields on the
Securities."
PASS-THROUGH RATE AND INTEREST RATE
Securities of any Class within a Series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
prospectus supplement with respect to any Series of Securities will specify the
Pass-Through Rate or interest rate for each Class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more Classes of Securities; and whether the distributions of interest on the
Securities of any Class will be dependent, in whole or in part, on the
performance of any obligor under a Cash Flow Agreement.
If so specified in the related prospectus supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or
interest rate and purchase price of such Security because, while interest may
accrue on each Asset during a certain period (each, an "ACCRUAL PERIOD"), the
distribution of such interest will be made on a day which may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a Class of Accrual Securities) on the monthly, quarterly or other
periodic date specified in the related prospectus supplement on which
distributions will be made to holders of Securities (a "DISTRIBUTION DATE")
will include interest accrued during the Accrual Period for such Distribution
Date. As indicated above under "-- Pass-Through Rate and Interest Rate," if the
Accrual Period ends on a date other than the day before a Distribution Date for
the related Series, the yield realized by the holders of such Securities may be
lower than the yield that would result if the Accrual Period ended on such day
before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets, including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations. The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
25
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Mortgage Loans. In this regard, it should be noted that certain
Assets may consist of Mortgage Loans with different Mortgage Rates. The rate of
principal payments on some or all of the Classes of Securities of a Series will
correspond to the rate of principal payments on the Assets in the related Trust
Fund and is likely to be affected by the existence of Lock-out Periods and
Prepayment Premium provisions of the Mortgage Loans underlying or comprising
such Assets, and by the extent to which the servicer of any such Mortgage Loan
is able to enforce such provisions. Mortgage Loans with a Lock-out Period or a
Prepayment Premium provision, to the extent enforceable, generally would be
expected to experience a lower rate of principal prepayments than otherwise
identical Mortgage Loans without such provisions, with shorter Lock-out Periods
or with lower Prepayment Premiums. Because of the depreciating nature of
manufactured housing, which limits the possibilities for refinancing, and
because the terms and principal amounts of manufactured housing contracts are
generally shorter and smaller than the terms and principal amounts of mortgage
loans secured by site-built homes, changes in interest rates have a
correspondingly smaller effect on the amount of the monthly payments on
manufactured housing contracts than on the amount of the monthly payments on
mortgage loans secured by site-built homes. Consequently, changes in interest
rates may play a smaller role in prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgage
on site-built homes. Conversely, local economic conditions and certain of the
other factors mentioned above may play a larger role in the prepayment behavior
of manufactured housing contracts than they do in the prepayment behavior of
loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that
is slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the prospectus supplement for a Series of Securities, the effect on yield on
one or more Classes of the Securities of such Series of prepayments of the
Assets in the related Trust Fund may be mitigated or exacerbated by any
provisions for sequential or selective distribution of principal to such
Classes.
When a full prepayment is made on a Mortgage Loan or a Contract, the
obligor is charged interest on the principal amount of the Mortgage Loan or
Contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or such other period specified in the related
prospectus supplement. Generally, the effect of prepayments in full will be to
reduce the amount of interest paid in the following month to holders of
Securities entitled to payments of interest because interest on the principal
amount of any Mortgage Loan or Contract so prepaid will be paid only to the
date of prepayment rather than for a full month. A partial prepayment of
principal is applied so as to reduce the outstanding principal balance of the
related Mortgage Loan or Contract as of the Due Date in the month in which such
partial prepayment is received or such other date as is specified in the
related prospectus supplement.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the
average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Loans and distributed on a Security, the greater the effect on such
investor's yield to maturity. The effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
26
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on
such Security.
PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related Series of Securities may
affect the ultimate maturity and the weighted average life of each Class of
such Series. Prepayments on the Mortgage Loans or Contracts comprising or
underlying the Assets in a particular Trust Fund will generally accelerate the
rate at which principal is paid on some or all of the Classes of the Securities
of the related Series.
If so provided in the prospectus supplement for a Series of Securities,
one or more Classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the stated principal amount (the
"SECURITY BALANCE") thereof is scheduled to be reduced to zero, calculated on
the basis of the assumptions applicable to such Series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a Class
of Securities of a Series will be influenced by the rate at which principal on
the Assets is paid to such Class, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "PREPAYMENT" includes
prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Securities may be affected
by the varying maturities of the Assets in a Trust Fund. If any Assets in a
particular Trust Fund have actual terms to maturity less than those assumed in
calculating final scheduled Distribution Dates for the Classes of Securities of
the related Series, one or more Classes of such Securities may be fully paid
prior to their respective final scheduled Distribution Dates, even in the
absence of prepayments. Accordingly, the prepayment experience of the Assets
will, to some extent, be a function of the mix of Mortgage Rates or Contract
Rates and maturities of the Mortgage Loans or Contracts comprising or
underlying such Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model or the Standard Prepayment Assumption ("SPA") prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of loans for
the life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The prospectus supplement with respect to each Series of Securities may
contain tables, if applicable, setting forth the projected weighted average
life of each Class of Offered Securities of such Series and the percentage of
the initial Security Balance of each such Class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such prospectus
supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
prospectus supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted
27
average life of the Securities. It is unlikely that prepayment of any Mortgage
Loans or Contracts comprising or underlying the Assets for any Series will
conform to any particular level of CPR, SPA or any other rate specified in the
related prospectus supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If so specified in the related prospectus supplement, a number of Mortgage
Loans may have balloon payments due at maturity (which may be a substantial
amount), and because the ability of a mortgagor to make a balloon payment
typically will depend upon its ability either to refinance the loan or to sell
the related Mortgaged Property, there is a risk that a number of Balloon
Payment Assets may default at maturity. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, real estate values, the mortgagor's
financial situation, prevailing mortgage loan interest rates, the mortgagor's
equity in the related Mortgaged Property, tax laws and prevailing general
economic conditions. Neither the Depositor, the Servicer, the Master Servicer
(if any), nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property except to the
extent provided in the related prospectus supplement. In the case of defaults,
recovery of proceeds may be delayed by, among other things, bankruptcy of the
mortgagor or adverse conditions in the market where the property is located. In
order to minimize losses on defaulted Mortgage Loans, the Servicer may, to the
extent and under the circumstances set forth in the related prospectus
supplement, be permitted to modify Mortgage Loans that are in default or as to
which a payment default is reasonably foreseeable. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan will tend
to extend the weighted average life of the Securities and may thereby lengthen
the period of time elapsed from the date of issuance of a Security until it is
retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be "stepped up" during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor or obligor under each Mortgage Loan or Contract generally will be
qualified on the basis of the Mortgage Rate or Contract Rate in effect at
origination. The repayment of any such Mortgage Loan or Contract may thus be
dependent on the ability of the mortgagor or obligor to make larger level
monthly payments following the adjustment of the Mortgage Rate or Contract
Rate. In addition, certain Mortgage Loans may be subject to temporary buydown
plans ("BUYDOWN MORTGAGE LOANS") pursuant to which the monthly payments made by
the mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments thereon (the "BUYDOWN PERIOD"). The periodic
increase in the amount paid by the mortgagor of a Buydown Mortgage Loan during
or at the end of the applicable Buydown Period may create a greater financial
burden for the mortgagor, who might not have otherwise qualified for a
mortgage, and may accordingly increase the risk of default with respect to the
related Mortgage Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination and the related margin over such index at
which interest accrues), the amount of interest accruing on the principal
balance of such Mortgage Loans may exceed the amount of the minimum scheduled
monthly payment thereon. As a result, a portion of the accrued interest on
negatively amortizing Mortgage Loans may be added to the principal balance
thereof and will bear interest at the applicable Mortgage Rate. The addition of
any such deferred interest to the principal balance of any related Class or
Classes of Securities will lengthen the weighted average life thereof and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased. In addition, with respect to certain ARM Loans
subject to negative amortization, during a period of declining interest rates,
it might be expected that each minimum scheduled monthly payment on such a
Mortgage Loan would exceed the amount of scheduled
28
principal and accrued interest on the principal balance thereof, and since such
excess will be applied to reduce the principal balance of the related Class or
Classes of Securities, the weighted average life of such Securities will be
reduced and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased.
As may be described in the related prospectus supplement, the applicable
Agreement may provide that all or a portion of the principal collected on or
with respect to the related Mortgage Loans may be applied by the related
Trustee to the acquisition of additional Mortgage Loans during a specified
period (rather than used to fund payments of principal to Securityholders
during such period) with the result that the related securities possess an
interest-only period, also commonly referred to as a revolving period, which
will be followed by an amortization period. Any such interest-only or revolving
period may, upon the occurrence of certain events to be described in the
related prospectus supplement, terminate prior to the end of the specified
period and result in the earlier than expected amortization of the related
Securities.
In addition, and as may be described in the related prospectus supplement,
the related Agreement may provide that all or a portion of such collected
principal may be retained by the Trustee (and held in certain temporary
investments, including Mortgage Loans) for a specified period prior to being
used to fund payments of principal to Securityholders.
The result of such retention and temporary investment by the Trustee of
such principal would be to slow the amortization rate of the related Securities
relative to the amortization rate of the related Mortgage Loans, or to attempt
to match the amortization rate of the related Securities to an amortization
schedule established at the time such Securities are issued. Any such feature
applicable to any Securities may terminate upon the occurrence of events to be
described in the related prospectus supplement, resulting in the current
funding of principal payments to the related Securityholders and an
acceleration of the amortization of such Securities.
TERMINATION
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, on any
date on which the aggregate principal balance of the Assets or the aggregate
Security Balance of the Securities of such Series declines to a percentage
specified in the related prospectus supplement (not to exceed 10%) of the
aggregate initial principal balance of such Assets or initial Security Balance
of such Securities, as the case may be, under the circumstances and in the
manner set forth therein. In addition, if so provided in the related prospectus
supplement, certain Classes of Securities may be purchased or redeemed in the
manner set forth therein. See "Description of the Securities -- Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing and
amount of principal payments on the Assets and thus the yield on the
Securities. In general, defaults on mortgage loans or contracts are expected to
occur with greater frequency in their early years. The rate of default on
Mortgage Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans with high Loan-to-Value Ratios, may be higher than for other
types of Mortgage Loans. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans and Contracts will be affected
by the general economic condition of the region of the country in which the
related Mortgage Properties or Manufactured Homes are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of
the Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the
29
number and principal amount of Mortgage Loans or Contracts that are repaid in
accordance with their terms will affect the weighted average life of the
Mortgage Loans or Contracts comprising or underlying the Assets and that of the
related Series of Securities.
REFINANCING
At the request of a mortgagor, the Servicer may allow the refinancing of a
Mortgage Loan or Contract in any Trust Fund by accepting prepayments thereon
and permitting a new loan secured by a mortgage on the same property. In the
event of such a refinancing, the new loan would not be included in the related
Trust Fund and, therefore, such refinancing would have the same effect as a
prepayment in full of the related Mortgage Loan or Contract. A Servicer may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, Servicers may encourage the refinancing of Mortgage Loans or
Contracts, including defaulted Mortgage Loans or Contracts, that would permit
creditworthy borrowers to assume the outstanding indebtedness of such Mortgage
Loans or Contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include "due-on-sale clauses" that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Mortgage Loans, except as set forth in the
related prospectus supplement, the Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Mortgaged Property and it is entitled to do so
under applicable law; provided, however, that the Servicer will not take any
action in relation to the enforcement of any due-on-sale provision which would
adversely affect or jeopardize coverage under any applicable insurance policy.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses" and
"Description of the Agreements -- Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements -- Due-on-Sale Provisions." The
Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. It is expected that the Servicer
will permit most transfers of Manufactured Homes and not accelerate the
maturity of the related Contracts. In certain cases, the transfer may be made
by a delinquent obligor in order to avoid a repossession of the Manufactured
Home. In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale clause". See "Certain Legal Aspects of the Contracts -- Transfers
of Manufactured Homes; Enforceability of Due-on-Sale Clauses."
THE DEPOSITOR
Wachovia Asset Securitization, Inc. (the "DEPOSITOR") is an indirect
wholly-owned subsidiary of Wachovia Corporation and was incorporated in the
State of North Carolina on February 27, 1996. The principal executive offices
of the Depositor are located at 8739 Research Drive, NC0121-Suite D, Charlotte,
North Carolina 28288-0121. Its telephone number is (704) 596-7616.
The Depositor formerly was an indirect wholly-owned subsidiary of First
Union Corporation. On September 1, 2001, Wachovia Corporation was merged with
and into First Union Corporation with the later entity surviving. Upon
completion of the merger, the surviving entity changed its name to Wachovia
Corporation. As a result, the Depositor is now an indirect wholly-owned
subsidiary of Wachovia Corporation.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
30
DESCRIPTION OF THE SECURITIES
GENERAL
The asset-backed certificates (the "CERTIFICATES") of a series (each, a
"SERIES") (including any Class of Certificates not offered hereby) will
represent the entire beneficial ownership interest in the trust fund (the
"TRUST" or the "TRUST FUND") created pursuant to the applicable Agreement. If a
Series of Securities includes asset-backed notes (the "NOTES" and, together
with the Certificates, the "SECURITIES"), such Notes will represent
indebtedness of the related Trust Fund and will be issued and secured pursuant
to an Indenture. Each Series of Securities will consist of one or more classes
(each, a "CLASS") of Securities that may:
o provide for the accrual of interest thereon based on fixed, variable or
adjustable rates;
o be senior (the "SENIOR CERTIFICATES" or the "SENIOR NOTES" and,
collectively, "SENIOR SECURITIES") or subordinate (the "SUBORDINATE
CERTIFICATES" or the "SUBORDINATE NOTES" and, collectively, "SUBORDINATE
SECURITIES") to one or more other Classes of Securities in respect of
certain distributions on the Securities;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or (B)
interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, "STRIP SECURITIES");
o provide for distributions of accrued interest thereon commencing only
following the occurrence of certain events, such as the retirement of one
or more other Classes of Securities of such Series (collectively,
"ACCRUAL SECURITIES");
o provide for payments of principal as described in the related prospectus
supplement, from all or only a portion of the Assets in such Trust Fund,
to the extent of available funds, in each case as described in the
related prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components thereof with one or more of the characteristics described in
this paragraph including a Strip Security component.
If so specified in the related prospectus supplement, distributions on one or
more Classes of a Series of Securities may be limited to collections from a
designated portion of the Assets in the related Trust Fund (each such portion
of Assets, an "ASSET GROUP"). Any such Classes may include Classes of
Securities of a Series offered pursuant to this prospectus and a related
prospectus supplement (the "OFFERED SECURITIES").
Each Class of Offered Securities of a Series will be issued in minimum
denominations corresponding to the Security Balances or, in the case of certain
Classes of Strip Securities, notional amounts or percentage interests specified
in the related prospectus supplement. The transfer of any Offered Securities
may be registered and such Securities may be exchanged without the payment of
any service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Securities of a Series may be issued in fully registered,
certificated form ("DEFINITIVE SECURITIES") or in book-entry form ("BOOK-ENTRY
SECURITIES"), as provided in the related prospectus supplement. See "Risk
Factors -- Risks Associated with the Securities -- Book-Entry Securities May
Experience Certain Problems" and "Description of the Securities -- Book-Entry
Registration and Definitive Securities." Definitive Securities will be
exchangeable for other Securities of the same Class and Series of a like
aggregate Security Balance, notional amount or percentage interest but of
different authorized denominations. See "Risk Factors -- Risks Associated with
the Securities -- Securities May Not be Liquid."
DISTRIBUTIONS
Distributions on the Securities of each Series will be made by or on
behalf of the Trustee on each Distribution Date as specified in the related
prospectus supplement from the Available Distribution
31
Amount for such Series and such Distribution Date. Distributions (other than
the final distribution) will be made to the persons in whose names the
Securities are registered at the close of business on, unless a different date
is specified in the related prospectus supplement, the last business day of the
month preceding the month in which the Distribution Date occurs (the "RECORD
DATE"), and the amount of each distribution will be determined as of the close
of business on the date specified in the related prospectus supplement (the
"DETERMINATION DATE"). All distributions with respect to each Class of
Securities on each Distribution Date will be allocated pro rata among the
outstanding Securityholders in such Class or by random selection or as
described in the related prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a Securityholder
at a bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make
such payments no later than the date specified in the related prospectus
supplement (and, if so provided in the related prospectus supplement, holds
Securities in the requisite amount specified therein), or by check mailed to
the address of the person entitled thereto as it appears on the security
register; provided, however, that the final distribution in retirement of the
Securities will be made only upon presentation and surrender of the Securities
at the location specified in the notice to Securityholders of such final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each Series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related prospectus supplement.
Generally, the "AVAILABLE DISTRIBUTION AMOUNT" for each Distribution Date
equals the sum of the following amounts:
o the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but due
on a date subsequent to the related Due Period (unless a different
period is specified in the related prospectus supplement, a "DUE PERIOD"
with respect to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs,
or the day after the Cut-off Date in the case of the first Due Period,
and will end on the first day of the month of the related Distribution
Date),
(b) all prepayments, together with related payments of the interest
thereon and related Prepayment Premiums, all proceeds of any insurance
policies to be maintained in respect of each Asset (to the extent such
proceeds are not applied to the restoration of the Asset or released in
accordance with the normal servicing procedures of a Servicer, subject
to the terms and conditions applicable to the related Asset)
(collectively, "INSURANCE PROCEEDS"), all other amounts received and
retained in connection with the liquidation of Assets in default in the
Trust Fund ("LIQUIDATION PROCEEDS"), and other unscheduled recoveries
received subsequent to the related Due Period,
(c) all amounts in the Collection Account that are due or reimbursable
to the Depositor, the Trustee, an Asset Seller, a Servicer, the Master
Servicer or any other entity as specified in the related prospectus
supplement or that are payable in respect of certain expenses of the
related Trust Fund, and
(d) all amounts received for a repurchase of an Asset from the Trust
Fund for defective documentation or a breach of representation or
warranty received subsequent to the related Due Period;
o if the related prospectus supplement so provides, interest or investment
income on amounts on deposit in the Collection Account, including any net
amounts paid under any Cash Flow Agreements;
32
o all advances made by a Servicer or the Master Servicer (if any) or any
other entity as specified in the related prospectus supplement with
respect to such Distribution Date;
o if and to the extent the related prospectus supplement so provides,
amounts paid by a Servicer or any other entity as specified in the
related prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
o to the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
The related prospectus supplement for a Series of Securities will describe
any variation in the calculation of the Available Distribution Amount for such
Series.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each Class of Securities (other than Classes of Strip Securities that have
no Pass-Through Rate or interest rate) may have a different Pass-Through Rate
or interest rate, which will be a fixed, variable or adjustable rate at which
interest will accrue on such Class or a Component thereof (the "PASS-THROUGH
RATE" in the case of Certificates). The related prospectus supplement will
specify the Pass-Through Rate or interest rate for each Class or Component or,
in the case of a variable or adjustable Pass-Through Rate or interest rate, the
method for determining the Pass-Through Rate or interest rate. Interest on the
Securities will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless the related prospectus supplement specifies a
different basis.
Distributions of interest in respect of the Securities of any Class will
be made on each Distribution Date (other than any Class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
prospectus supplement, and any Class of Strip Securities that are not entitled
to any distributions of interest) based on the Accrued Security Interest for
such Class and such Distribution Date, subject to the sufficiency of the
portion of the Available Distribution Amount allocable to such Class on such
Distribution Date. Prior to the time interest is distributable on any Class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such Class will be added to the Security Balance thereof on
each Distribution Date. With respect to each Class of Securities and each
Distribution Date (other than certain Classes of Strip Securities), "ACCRUED
SECURITY INTEREST" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below. Accrued Security Interest on certain Classes of
Strip Securities will be equal to interest accrued during the related Accrual
Period on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate or interest rate,
reduced as described below, or interest accrual in the manner described in the
related prospectus supplement. The method of determining the notional amount
for a certain Class of Strip Securities will be described in the related
prospectus supplement. Reference to notional amount is solely for convenience
in certain calculations and does not represent the right to receive any
distributions of principal. Unless otherwise provided in the related prospectus
supplement, the Accrued Security Interest on a Series of Securities will be
reduced in the event of prepayment interest shortfalls, which are shortfalls in
collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans or Contracts
comprising or underlying the Assets in the Trust Fund for such Series. The
particular manner in which such shortfalls are to be allocated among some or
all of the Classes of Securities of that Series will be specified in the
related prospectus supplement. The related prospectus supplement will also
describe the extent to which the amount of Accrued Security Interest that is
otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a Class of
33
Offered Securities may be reduced as a result of any other contingencies,
including delinquencies, losses and deferred interest on or in respect of the
Mortgage Loans or Contracts comprising or underlying the Assets in the related
Trust Fund. Unless otherwise provided in the related prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a Class of Securities by reason of the allocation to such Class of a portion of
any deferred interest on the Mortgage Loans or Contracts comprising or
underlying the Assets in the related Trust Fund will result in a corresponding
increase in the Security Balance of such Class. See "Risk Factors -- Risk
Associated with the Securities -- Rate of Prepayment on Assets May Adversely
Affect Average Lives and Yields on the Securities" and "Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain Classes of Strip
Securities, will have a Security Balance which, at any time, will equal the
then maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Assets and other assets included
in the related Trust Fund. The outstanding Security Balance of a Security will
be reduced to the extent of distributions of principal thereon from time to
time and, if and to the extent so provided in the related prospectus
supplement, by the amount of losses incurred in respect of the related Assets,
may be increased in respect of deferred interest on the related Mortgage Loans
to the extent provided in the related prospectus supplement and, in the case of
Accrual Securities prior to the Distribution Date on which distributions of
interest are required to commence, will be increased by any related Accrued
Security Interest. If so specified in the related prospectus supplement, the
initial aggregate Security Balance of all Classes of Securities of a Series
will be greater than the outstanding aggregate principal balance of the related
Assets as of the applicable Cut-off Date. The initial aggregate Security
Balance of a series and each Class thereof will be specified in the related
prospectus supplement. Distributions of principal will be made on each
Distribution Date to the Class or Classes of Securities in the amounts and in
accordance with the priorities specified in the related prospectus supplement.
Certain Classes of Strip Securities with no Security Balance are not entitled
to any distributions of principal.
CATEGORIES OF CLASSES OF SECURITIES
The Securities of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a Series of Securities may identify the Classes which
comprise such Series by reference to the following categories or another
category specified in the applicable prospectus supplement.
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PRINCIPAL TYPES
ACCRETION DIRECTED CERTIFICATES OR
NOTES ........................... A Class of Certificates or Notes that receives principal
payments from amounts that would otherwise be distributed
as interest on specified Accrual Certificates or Notes. Such
principal payments may be in lieu of or in addition to
principal payments from principal receipts on the Assets for
the related Series.
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CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
COMPANION CERTIFICATES OR NOTES
(ALSO SOMETIMES REFERRED TO AS
"SUPPORT CERTIFICATES" OR
"SUPPORT NOTES") ....................... A Class of Certificates or Notes that is entitled to receive
principal payments on any Distribution Date only if
scheduled payments have been made on specified Planned
Amortization Certificates or Notes, Targeted Amortization
Certificates or Notes and/or Scheduled Amortization
Certificates or Notes.
COMPONENT CERTIFICATES OR NOTES ......... A Class of Certificates or Notes consisting of two or more
specified components (each, a "COMPONENT") as described in
the applicable prospectus supplement. The Components of a
Class of Component Certificates or Notes may have different
principal and/or interest payment characteristics but together
constitute a single Class and do not represent severable
interests. Each Component of a Class of Component
Certificates or Notes may be identified as falling into one or
more of the categories in this chart.
LOCKOUT CERTIFICATES OR NOTES ........... A Class of Senior Certificates or Notes that is designed not to
participate in or to participate to a limited extent in (i.e., to
be "locked out" of), for a specified period, the receipt of
(1) principal prepayments on the Assets that are allocated
disproportionately to the Classes of Senior Certificates or
Notes of such Series as a group pursuant to a "shifting
interest" structure and/or (2) scheduled principal payments on
the Assets that are allocated to the Classes of Senior
Certificates or Notes as a group. A Class of Lockout
Certificates or Notes will typically not be entitled to receive,
or will be entitled to receive only a restricted portion of,
distributions or principal prepayments and/or scheduled
principal payments, as applicable, for a period of several
years, during which time all or a portion of such principal
payments that it would otherwise be entitled to receive in the
absence of a "lockout" structure will be distributed in
reduction of the principal balances of other Classes of Senior
Certificates or Notes. Lockout Certificates or Notes are
designed to minimize weighted average life volatility during
the lockout period.
NOTIONAL AMOUNT CERTIFICATES OR
NOTES .................................. A Class of Certificates or Notes having no principal balance
and bearing interest on the related notional amount. The
notional amount is used for purposes of the determination of
interest distributions.
35
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PASS-THROUGH CERTIFICATES OR
NOTES .................................... A Class of Senior Securities that is entitled to receive all or a
specified percentage of the principal payments that are
distributable to the Senior Certificates or applicable group of
Senior Certificates or Notes (other than any Ratio Strip
Certificates or Notes) in the aggregate on a Distribution Date
and that is not designated as a Class of Sequential Pay
Certificates or Notes.
PLANNED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "PAC
CERTIFICATES" OR "PAC NOTES") ............ A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming two constant prepayment rates
for the underlying Assets. These two rates are the endpoints
for the "structuring range" for the Class of Planned
Amortization Certificates or Notes. The Planned
Amortization Certificates or Notes in any Series of Securities
may be subdivided into different categories (e.g., Planned
Amortization Certificates or Notes I ("PAC I"), Planned
Amortization Certificates or Notes II ("PAC II") and so
forth) derived using different structuring ranges and/or
payment priorities. A Class of PAC Certificates or Notes is
designed to provide protection against volatility of weighted
average life if prepayments occur at a constant rate within the
structuring range.
RATIO STRIP CERTIFICATES OR NOTES ......... A Class of Certificates or Notes that is entitled to receive a
constant proportion, or "ratio strip," of the principal
payments on the underlying Assets.
SCHEDULED AMORTIZATION
CERTIFICATES OR NOTES (ALSO
SOMETIMES REFERRED TO AS
"SCHEDULED CERTIFICATES" OR
"SCHEDULED NOTES") ....................... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule but is not designated as a Class of Planned
Amortization Certificates or Notes or Targeted Amortization
Certificates or Notes. The schedule is derived by assuming
either two constant prepayment rates or a single constant
prepayment rate for the underlying Assets. In the former
case, the two rates are the endpoints for the "structuring
range" for the Scheduled Amortization Certificates or Notes
and such range generally is narrower than that for a Planned
Amortization Certificates or Notes. Typically, the Companion
Certificates or Notes for the applicable Series of Certificates
or Notes generally will represent a smaller percentage of the
Class of Scheduled Amortization Certificates or Notes than
Companion Certificates or Notes generally would represent in
relation to a Class of Planned Amortization Certificates or
36
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
Notes or Targeted Amortization Certificates or Notes. A
Class of Scheduled Amortization Certificates or Notes is
generally less sensitive to weighted average life volatility as a
result of prepayments than a Class of Companion Certificates
or Notes but more sensitive than a Class of Planned
Amortization Certificates or Notes or Targeted Amortization
Certificates or Notes.
SENIOR CERTIFICATES OR NOTES ........... A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
prior to the Classes of Subordinated Securities.
SEQUENTIAL PAY CERTIFICATES OR
NOTES ................................. A Class of Certificates or Notes that is entitled to receive
principal payments in a prescribed sequence, that does not
have a predetermined principal balance schedule and that, in
most cases, is entitled to receive payments of principal
continuously from the first Distribution Date on which it
receives principal until it is retired. A Class of Sequential Pay
Certificates or Notes may receive principal payments
concurrently with one or more other Classes of Sequential
Pay Certificates or Notes. A single Class the is entitled to
receive principal payments before or after other Classes in
the same Series of Securities may be identified as a Class of
Sequential Pay Certificates or Notes.
SUBORDINATED CERTIFICATES OR
NOTES ................................. A Class of Certificates or Notes that is entitled to receive
payments of principal and interest on each Distribution Date
only after the Senior Securities and Classes of Subordinated
Securities with higher priority of distributions, if any, have
received their full principal and interest entitlements.
SUPER SENIOR CERTIFICATES OR
NOTES ................................. A Class of Senior Certificates or Notes that will not bear its
share of certain losses after the Classes of Subordinated
Certificates or Notes are no longer outstanding for so long as
one or more other specified Classes of Senior Certificates or
Notes are outstanding.
SUPER SENIOR SUPPORT CERTIFICATES
OR NOTES .............................. A Class of Senior Certificates or Notes that bears certain
losses allocated to one or more Classes of Super Senior
Certificates or Notes after the Classes of Subordinated
Certificates or Notes are no longer outstanding.
TARGETED AMORTIZATION CERTIFICATES
OR NOTES (ALSO SOMETIMES
REFERRED TO AS A "TAC
CERTIFICATES" or "TAC NOTES") ......... A Class of Certificates or Notes that is designed to receive
principal payments using a predetermined principal balance
schedule derived by assuming a single constant prepayment
37
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
rate for the underlying Assets. A Class of TAC Certificates or
TAC Notes is designed to provide some protection against
shortening of weighted average life if prepayments occur at a
rate exceeding the assumed constant prepayment rate used to
derive the principal balances schedule of such Class of
Certificates or Notes.
INTEREST TYPES
ACCRUAL CERTIFICATES OR NOTES ............ A Class of Certificates or Notes that accretes the amount of
accrued interest otherwise distributable on such Class, which
amount will be added as principal to the principal balance of
such Class on each applicable Distribution Date. Such
accretion may continue until some specified event has
occurred or until such Accrual Certificates or Notes are
retired.
FIXED RATE CERTIFICATES OR NOTES ......... A Class of Certificates or Notes with an interest rate that is
fixed throughout the life of the Class.
FLOATING RATE CERTIFICATES OR
NOTES ................................... A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies directly with changes in such index.
INTEREST ONLY CERTIFICATES OR
NOTES ................................... A Class that is entitled to receive some or all of the interest
payments made on the Assets and little or no principal.
Interest Only Certificates or Notes have either no principal
balance, a nominal principal balance or a notional amount. A
nominal principal balance represents actual principal that will
be paid on the Certificates or Notes. It is referred to as
nominal since it is extremely small compared to other Classes.
A notional amount is the amount used as a reference to
calculate the amount of interest due on a Class of Interest
Only Certificates or Notes that is not entitled to any
distributions in respect of principal.
INVERSE FLOATING RATE CERTIFICATES
OR NOTES ................................ A Class of Certificates or Notes with an interest rate that
resets periodically based upon a designated index and that
varies inversely with changes in such index and with changes
in the interest rate payable on the related Class of Floating
Rate Certificates or Notes.
PREPAYMENT PREMIUM CERTIFICATES
OR NOTES ................................ A Class of Certificates or Notes that is only entitled to
penalties or premiums, if any, due in connection with a full or
partial prepayment of an Asset.
38
CATEGORIES OF CLASSES DEFINITION
- --------------------- ----------
PRINCIPAL ONLY CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes that does not bear interest
and is entitled to receive only distributions in respect of
principal.
STEP COUPON CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes with a fixed interest rate that
is reduced to a lower fixed rate after a specific period of time.
The difference between the initial interest rate and the lower
interest rate will be supported by a reserve fund established
on the closing date.
VARIABLE RATE CERTIFICATES OR
NOTES ....................... A Class of Certificates or Notes with an interest rate that
resets periodically and is calculated by reference to the rate
or rates of interest applicable to the Assets.
COMPONENTS
To the extent specified in the related prospectus supplement, distribution
on a Class of Securities may be based on a combination of two or more different
Components as described under "-- General" above. To such extent, the
descriptions set forth under "-- Distributions of Interest on the Securities"
and "-- Distributions of Principal of the Securities" above also relate to
Components of such a Class of Securities. In such case, reference in such
sections to Security Balance and Pass-Through Rate or interest rate refer to
the principal balance, if any, of any such Component and the Pass-Through Rate
or interest rate, if any, on any such Component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related prospectus supplement, Prepayment Premiums
that are collected on the Mortgage Loans in the related Trust Fund will be
distributed on each Distribution Date to the Class or Classes of Securities
entitled thereto in accordance with the provisions described in such prospectus
supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a Series of Securities
consisting of one or more Classes of Subordinate Securities, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Assets have been incurred, the amount of such losses or shortfalls will be
borne first by a Class of Subordinate Securities in the priority and manner and
subject to the limitations specified in such prospectus supplement. See
"Description of Credit Support" for a description of the types of protection
that may be included in a Trust Fund against losses and shortfalls on Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Securities evidencing an interest in a Trust
Fund, if so provided in the related prospectus supplement, the Servicer or
another entity described therein will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds
or funds held in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of payments of principal (other than any balloon payments) and
interest (net of related servicing fees and Retained Interest) that were due on
the Assets in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Servicer's (or another
entity's) good faith determination that such
39
advances will be reimbursable from Related Proceeds (as defined below). In the
case of a Series of Securities that includes one or more Classes of Subordinate
Securities and if so provided in the related prospectus supplement, the
Servicer's (or another entity's) advance obligation may be limited only to the
portion of such delinquencies necessary to make the required distributions on
one or more Classes of Senior Securities and/or may be subject to the
Servicer's (or another entity's) good faith determination that such advances
will be reimbursable not only from Related Proceeds but also from collections
on other Assets otherwise distributable on one or more Classes of such
Subordinate Securities. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the Class or Classes of Securities entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Servicer's (or another entity's) funds will be reimbursable only out of related
recoveries on the Assets, including amounts received under any form of Credit
Support, respecting which such advances were made (as to any Assets, "RELATED
PROCEEDS") and from any other amounts specified in the related prospectus
supplement, including out of any amounts otherwise distributable on one or more
Classes of Subordinate Securities of such Series; provided, however, that any
such advance will be reimbursable from any amounts in the Collection Account
prior to any distributions being made on the Securities to the extent that the
Servicer (or such other entity) shall determine in good faith that such advance
(a "NONRECOVERABLE ADVANCE") is not ultimately recoverable from Related
Proceeds or, if applicable, from collections on other Assets otherwise
distributable on such Subordinate Securities. If advances have been made by the
Servicer from excess funds in the Collection Account, the Servicer is required
to replace such funds in the Collection Account on any future Distribution Date
to the extent that funds in the Collection Account on such Distribution Date
are less than payments required to be made to Securityholders on such date. If
so specified in the related prospectus supplement, the obligations of the
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related prospectus supplement.
If and to the extent so provided in the related prospectus supplement, the
Servicer (or another entity) will be entitled to receive interest at the rate
specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the applicable
Agreement and described in such prospectus supplement.
If specified in the related prospectus supplement, the Master Servicer or
the Trustee will be required to make advances, subject to certain conditions
described in the prospectus supplement, in the event of a Servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any Class of Securities of a Series,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, will forward or cause to be forwarded to each such
holder, to the Depositor and to such other parties as may be specified in the
applicable Agreement, a statement generally setting forth, in each case to the
extent applicable and available:
o the amount of such distribution to holders of Securities of such Class
applied to reduce the Security Balance thereof;
o the amount of such distribution to holders of Securities of such Class
allocable to Accrued Security Interest;
o the amount of such distribution allocable to Prepayment Premiums;
o the amount of related servicing compensation and such other customary
information as is required to enable Securityholders to prepare their tax
returns;
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o the aggregate amount of advances included in such distribution, and the
aggregate amount of unreimbursed advances at the close of business on
such Distribution Date;
o the aggregate principal balance of the Assets at the close of business
on such Distribution Date;
o the number and aggregate principal balance of Mortgage Loans or
Contracts in respect of which (a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent, (c) three or more scheduled
payments are delinquent and (d) foreclosure proceedings have been
commenced;
o with respect to any Mortgage Loan or Contract liquidated during the
related Due Period, (a) the portion of such liquidation proceeds payable
or reimbursable to a Servicer (or any other entity) in respect of such
Mortgage Loan and (b) the amount of any loss to Securityholders;
o with respect to collateral acquired by the Trust Fund through
foreclosure or otherwise (a "REO PROPERTY") relating to a Mortgage Loan
or Contract and included in the Trust Fund as of the end of the related
Due Period, the date of acquisition;
o with respect to each REO Property relating to a Mortgage Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the applicable Agreement), (c) the aggregate amount of
unreimbursed servicing expenses and unreimbursed advances in respect
thereof and (d) if applicable, the aggregate amount of interest accrued
and payable on related servicing expenses and related advances;
o with respect to any such REO Property sold during the related Due Period
(a) the aggregate amount of sale proceeds, (b) the portion of such sales
proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Securityholders in respect of the related Mortgage
Loan;
o the aggregate Security Balance or notional amount, as the case may be,
of each Class of Securities (including any Class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a Class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
o the aggregate amount of principal prepayments made during the related
Due Period;
o the amount deposited in the reserve fund, if any, on such Distribution
Date;
o the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
o the aggregate unpaid Accrued Security Interest, if any, on each Class of
Securities at the close of business on such Distribution Date;
o in the case of Securities with a variable Pass-Through Rate or interest
rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified
in the related prospectus supplement;
o in the case of Securities with an adjustable Pass-Through Rate or
interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related prospectus supplement;
41
o as to any Series which includes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close of
business on such Distribution Date;
o during the Pre-Funding Period, the remaining Pre-Funded Amount and the
portion of the Pre-Funding Amount used to acquire Subsequent Mortgage
Loans since the preceding Distribution Date;
o during the Pre-Funding Period, the amount remaining in the Capitalized
Interest Account; and
o the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
Within a reasonable period of time after the end of each calendar year,
the Servicer, the Master Servicer or the Trustee, as provided in the related
prospectus supplement, shall furnish to each Securityholder of record at any
time during the calendar year such information required by the Code and
applicable regulations thereunder to enable Securityholders to prepare their
tax returns. See "Description of the Securities -- Book-Entry Registration and
Definitive Securities."
TERMINATION; OPTIONAL PURCHASE OF MORTGAGE LOANS
The obligations created by the applicable Agreement for each Series of
Securities will terminate upon the payment to Securityholders of that Series of
all amounts held in the Collection Account or by a Servicer, the Master
Servicer, if any, or the Trustee and required to be paid to them pursuant to
such Agreement following the earlier of (i) the final payment or other
liquidation of the last Asset subject thereto or the disposition of all
property acquired upon foreclosure of any Mortgage Loan or Contract subject
thereto and (ii) the purchase of all of the assets of the Trust Fund by the
party entitled to effect such termination, under the circumstances and in the
manner set forth in the related prospectus supplement. In no event, however,
will the Trust Fund continue beyond the expiration of 21 years from the death
of the last survivor of certain persons named in the Agreement. Written notice
of termination of the applicable Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice
of termination.
If so specified in the related prospectus supplement, a Series of
Securities may be subject to optional early termination through the repurchase
of the Assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. In the event that any
such party has caused the related Trust Fund (or any segregated pool of assets
therein) to be treated as a REMIC, any such purchase will be affected only
pursuant to either (a) a "clean up call" as defined in Treasury Regulations
Section 1.860G-2(j) or (b) a "qualified liquidation" as defined in Code Section
860F(a)(4)(A). Any qualified liquidation will effect early retirement of the
Securities of that Series, but the right to purchase may be exercised only
after the aggregate principal balance of the Assets for such Series at the time
of purchase is less than a specified percentage, not exceeding 10%, of the
aggregate principal balance as of the Cut-off Date for the Series, or after the
date set forth in the applicable prospectus supplement. If so provided in the
related prospectus supplement, upon the reduction of the Security Balance of a
specified Class or Classes of Securities by a specified percentage, the party
specified therein will solicit bids for the purchase of all assets of the Trust
Fund, or of a sufficient portion of such assets to retire such Class or Classes
or purchase such Class or Classes at a price set forth in the related
prospectus supplement, in each case, under the circumstances and in the manner
set forth therein. Such price will at least equal the outstanding Security
Balances and any accrued and unpaid interest thereon (including any unpaid
interest shortfalls for prior Distribution Dates). Any sale of the Assets of
the Trust Fund will be without recourse to the Trust Fund or the
Securityholders. Any such purchase or solicitation of bids may be made only
when the aggregate Security Balance of such Class or Classes declines to a
percentage of the Initial Security Balance of such Securities (not to exceed
10%) specified in the related prospectus supplement. In addition, if so
provided in the related prospectus supplement, certain Classes of Securities
may be purchased or redeemed in the manner set forth therein.
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OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the Depositor, the
Servicer or such other party specified in the related prospectus supplement
may, at such party's option, repurchase (i) any Asset which is in default or as
to which default is reasonably foreseeable if, in the Depositor's, the
Servicer's or such other party's judgment, the related default is not likely to
be cured by the borrower or default is not likely to be averted and (ii) any
Asset as to which the origination of such Asset breached a representation or
warranty made with respect of such Mortgage Loan to the Depositor, the Servicer
or such other party at a price equal to the unpaid principal balance thereof
plus accrued interest thereon and under the conditions set forth in the
applicable prospectus supplement.
DEFINITIVE FORM
If so specified in the related prospectus supplement, Securities of a
Series may be issued in fully registered certificated form (such Securities,
"DEFINITIVE SECURITIES"). Distributions of principal of, and interest on,
Definitive Securities will be made directly to holders of Definitive Securities
in accordance with the procedures set forth in the Agreement. The Definitive
Securities of a Series offered hereby and by means of the applicable prospectus
supplement will be transferable and exchangeable at the office or agency
maintained by the Trustee or such other entity for such purpose set forth in
the applicable prospectus supplement. No service charge will be made for any
transfer or exchange of Definitive Securities, but the Trustee or such other
entity may require payment of a sum sufficient to cover any tax or other
governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Fund (or one or
more pools of segregated assets therein) as a REMIC, the Residual Securities
thereof will be issued as Definitive Securities. No legal or beneficial
interest in all or a portion of any Residual Security may be transferred
without the receipt by the transferor and the Trustee of an affidavit described
under "-- Taxation of Owners of Residual Securities -- Tax-Related Restrictions
on Transfer of Residual Securities."
BOOK-ENTRY REGISTRATION AND FORM
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series will be transferable and exchangeable at the office
of the registrar identified in the related prospectus supplement. Unless
otherwise specified in the related prospectus supplement, no service charge
will be made for any such registration or transfer of such Securities, but the
owner may be required to pay a sum sufficient to cover any tax or other
governmental charge.
If so specified in the related prospectus supplement, Book-Entry
Securities may be initially represented by one or more Securities registered in
the name of DTC and be available only in the form of book-entries. If specified
in the related prospectus supplement, holders of Securities may hold beneficial
interests in Book-Entry Securities through DTC (in the United States) or
Clearstream or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
Clearstream and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules
on behalf of the relevant European international clearing system by its
Depositary. However, each such cross-market transaction will require delivery
of instructions to
43
the relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines. The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to its
Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities through DTC, and making or receiving payment
in accordance with normal procedures for same-day funds settlement applicable
to DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will
be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any
transactions in such securities settled during such processing will be reported
to the Clearstream Participant or Euroclear Participant on such business day.
Cash received in Clearstream or Euroclear as a result of sales of Securities by
or through a Clearstream Participant or a Euroclear Participant to a
Participant will be received with value on the DTC settlement date but will be
available in the relevant Clearstream or Euroclear cash account only as of the
business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended ("EXCHANGE ACT"). DTC was created to hold securities
for its participating members ("PARTICIPANTS") and to facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entries, thereby eliminating the need for physical movement of
securities. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations which may include underwriters, agents or
dealers with respect to the Securities of any Class or Series. Indirect access
to the DTC system also is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("INDIRECT PARTICIPANTS").
The rules applicable to DTC and Participants are on file with the SEC.
Beneficial owners ("SECURITY OWNERS") that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, Book-Entry Securities may do so only
through Participants and Indirect Participants. Participants who are Security
Owners of Book-Entry Securities will receive a credit for such Securities on
DTC's records. The ownership interest of such holder will in turn be recorded
on respective records of the Participants and Indirect Participants. Such
holders will not receive written confirmation from DTC of their purchase, but
are expected to receive written confirmations providing details of the
transaction, as well as periodic statements of their holdings, from the
Participant or Indirect Participant through which the Securityholders entered
into the transaction. Unless and until Definitive Securities are issued as
described below, it is anticipated that the only "holder" of Book-Entry
Securities of any Series will be Cede & Co. ("CEDE"), as nominee of DTC.
Security Owners will only permitted to exercise the rights of holders
indirectly through Participants and DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Securityholders.
DTC has advised the Servicer and the Depositors that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be
taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Securities are credited. DTC has advised the Servicer
44
and the Depositors that DTC will take such action with respect to any
Percentage Interests of the Book-Entry Securities of a Series only at the
direction of and on behalf of such Participants with respect to such Percentage
Interests of the Book-Entry Securities. DTC may take actions, at the direction
of the related Participants, with respect to some Book-Entry Securities which
conflict with actions taken with respect to other Book-Entry Securities.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg
("CLEARSTREAM"), was incorporated in 1970 as a limited company under Luxembourg
law. Clearstream is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including U.S.
financial institutions or their subsidiaries. No single entity may own more
than five percent of Clearstream's stock.
Clearstream is registered as a bank in Luxembourg, and as such is subject
to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers ("CLEARSTREAM
PARTICIPANTS") and facilitates the clearance and settlement of securities
transactions by electronic book-entry transfers between their accounts.
Clearstream provides various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream also deals with domestic securities markets
in several countries through established depository and custodial
relationships. Clearstream has established an electronic bridge with Euroclear
Bank S.A./N.V. as the Euroclear Operator in Brussels to facilitate settlement
of trades between systems. Clearstream currently accepts over 70,000 securities
issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain
a custodial relationship with an account holder of Clearstream.
The Euroclear System ("EUROCLEAR") was created in 1968 to hold securities
for its participants ("EUROCLEAR PARTICIPANTS") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in a variety of currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by Euroclear Bank
S.A./N.V. (the "EUROCLEAR OPERATOR"), under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation (the "COOPERATIVE"). All
operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "TERMS AND CONDITIONS"). The Terms
45
and Conditions govern transfers of securities and cash within the Euroclear
System, withdrawals of securities and cash from the Euroclear System and
receipts of payments with respect to securities in the Euroclear System. All
securities in the Euroclear System are held on a fungible basis without
attribution of specific Securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments and distributions with respect to Book-Entry Securities held
through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by Citibank,
N.A. or JPMorgan Chase Bank, the relevant depositary of Clearstream and
Euroclear (the "DEPOSITARIES" ), respectively. Such payments and distributions
will be subject to tax withholding in accordance with relevant United States
tax laws and regulations. See "Federal Income Tax Consequences". Clearstream or
the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder on behalf of a Clearstream
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to its Depositary's ability to effect such actions
on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
Book-Entry Securities of a Series will be converted to Definitive
Securities and reissued to beneficial owners or their nominees, rather than to
DTC or its nominee, only under the circumstances provided in the related
Pooling and Servicing Agreement, which generally will include, except if
otherwise provided therein, if (i) DTC or the Servicer advises the Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities of such Series and the Servicer is unable to locate a qualified
successor, (ii) the Servicer, at its sole option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of a Servicer
Termination Event, a majority of the aggregate Percentage Interest of any Class
of Securities of such Series advises DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) to the exclusion of any
physical Securities being issued to Security Owners is no longer in the best
interests of Security Owners of such Class of Securities. Upon issuance of
Definitive Securities of a Series to Security Owners, such Book-Entry
Securities will be transferable directly (and not exclusively on a book-entry
basis) and registered holders will deal directly with the Trustee with respect
to transfers, notices and distributions.
46
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Securities, FASIT Securities, Grantor Trust Securities
Securities representing interests in a Trust Fund, or a portion thereof,
that the Trustee will elect to have treated as REMIC Securities, FASIT
Securities or Grantor Trust Securities will be issued, and the related Trust
Fund will be created, pursuant to a pooling and servicing agreement (a "POOLING
AND SERVICING AGREEMENT") among the Depositor, the Trustee and the sole
Servicer or Master Servicer, as applicable. The Assets of such Trust Fund will
be transferred to the Trust Fund and thereafter serviced in accordance with the
terms of the Pooling and Servicing Agreement. In the event there are multiple
Servicers of the Assets of such Trust Fund, each Servicer will perform its
servicing functions pursuant to a servicing agreement (each, an "UNDERLYING
SERVICING AGREEMENT").
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Partnership Securities that are partnership interests for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
Pooling and Servicing Agreement.
A Series of Notes issued by a Trust Fund will be issued pursuant to an
indenture (the "INDENTURE") between the related Trust Fund and the Indenture
Trustee named in the related prospectus supplement. The Trust Fund will be
established pursuant to a deposit trust agreement (each, a "DEPOSIT TRUST
AGREEMENT") between the Depositor and an owner trustee specified in the
prospectus supplement relating to such Series of Notes. The Assets securing
payment on the Notes will be serviced in accordance with a servicing agreement
(each, an "INDENTURE SERVICING AGREEMENT") between the related Trust Fund as
issuer of the Notes, the Servicer and the Indenture Trustee. The Pooling and
Servicing Agreements, the Indenture Servicing Agreements, the Underlying
Servicing Agreements and the Indenture are referred to each as an "AGREEMENT."
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may appear
in each Pooling and Servicing Agreement and Underlying Servicing Agreement. The
prospectus supplement for a Series of Securities will describe any provision of
the applicable Agreement relating to such Series that materially differs from
the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the applicable Agreement for each
Trust Fund and the description of such provisions in the related prospectus
supplement. The provisions of each Agreement will vary depending upon the
nature of the Securities to be issued thereunder and the nature of the related
Trust Fund. As used herein with respect to any Series, the term "SECURITY"
refers to all of the Securities of that Series, whether or not offered hereby
and by the related prospectus supplement, unless the context otherwise
requires. A form of a Pooling and Servicing Agreement has been filed as an
exhibit to the Registration Statement of which this prospectus is a part. The
Depositor will provide a copy of the Pooling and Servicing Agreement (without
exhibits) relating to any Series of Securities without charge upon written
request of a Securityholder of such Series addressed to Wachovia Asset
Securitization, Inc., 8739 Research Drive, NC0121-Suite D, Charlotte, North
Carolina 28288-0121, Attention: Vice President.
The servicers (the "SERVICERS"), any master servicer (the "MASTER
SERVICER") and the trustee (the "TRUSTEE") or indenture trustee (the "INDENTURE
TRUSTEE"), as applicable, with respect to any Series of Securities will be
named in the related prospectus supplement. In the event there are multiple
47
Servicers for the Assets in a Trust Fund, a Master Servicer will perform
certain administration, calculation and reporting functions with respect to
such Trust Fund and, if specified in the related prospectus supplement, will
supervise the related Servicers pursuant to a Pooling and Servicing Agreement.
With respect to Series involving a Master Servicer, references in this
prospectus to the Servicer will apply to the Master Servicer where
non-servicing obligations are described. If so specified in the related
prospectus supplement, a manager or administrator may be appointed pursuant to
the Pooling and Servicing Agreement for any Trust Fund to administer such Trust
Fund or certain administrative functions which would otherwise be performed by
the Servicer or the Master Servicer may be performed by the Trustee.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any Series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other
than principal and interest due on or before the Cut-off Date and other than
any Retained Interest. The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Assets and the
other assets comprising the Trust Fund for such Series. Each Asset will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
Such schedule will include detailed information to the extent available and
relevant (i) in respect of each Mortgage Loan included in the related Trust
Fund, including without limitation, the city and state of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Loan-to-Value Ratio as of the date
indicated and payment and prepayment provisions, if applicable; and (ii) in
respect of each Contract included in the related Trust Fund, including without
limitation the outstanding principal amount and the Contract Rate.
With respect to each Mortgage Loan, except as otherwise specified in the
related prospectus supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which will generally include the original Mortgage Note
endorsed, without recourse, in blank or to the order of the Trustee, the
original Mortgage (or a certified copy thereof) with evidence of recording
indicated thereon and an assignment of the Mortgage to the Trustee in
recordable form. Notwithstanding the foregoing, a Trust Fund may include
Mortgage Loans where the original Mortgage Note is not delivered to the Trustee
if the Depositor delivers to the Trustee or the custodian a copy or a duplicate
original of the Mortgage Note, together with an affidavit certifying that the
original thereof has been lost or destroyed. With respect to such Mortgage
Loans, the Trustee (or its nominee) may not be able to enforce the Mortgage
Note against the related borrower. The Asset Seller or other entity specified
in the related prospectus supplement will be required to agree to repurchase,
or substitute for, each such Mortgage Loan that is subsequently in default if
the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original Mortgage Note. The applicable Agreement
will generally require the Depositor or another party specified in the related
prospectus supplement to promptly cause each such assignment of Mortgage to be
recorded in the appropriate public office for real property records, unless (i)
with respect to a particular state, the Trustee has received an opinion of
counsel acceptable to it that such recording is not required to make the
assignment effective against the parties to the Mortgage or subsequent
purchasers or encumbrancers of the Mortgaged Property or (ii) recordation in a
state is not required by the Rating Agencies rating the Series in order to
obtain the initial ratings on the Securities described in the related
prospectus supplement.
Notwithstanding the preceding paragraph, with respect to any Mortgage Loan
which has been recorded in the name of Mortgage Electronic Registration
Systems, Inc. ("MERS") or its designee, no mortgage assignment in favor of the
Trustee will be required to be prepared or delivered. Instead, the Master
Servicer and the applicable Servicer will be required to take all actions as
are necessary to cause the applicable Trust Fund to be shown as the owner of
the related Mortgage Loan on the records of MERS for purposes of the system of
recording transfers of beneficial ownership of mortgages maintained by MERS.
48
The Trustee (or a custodian) will review such Mortgage Loan documents
within a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the benefit of the
Securityholders. If any such document is found to be missing or defective in
any material respect, the Trustee (or such custodian) shall immediately notify
the Servicer and the Depositor, and the Servicer shall immediately notify the
relevant Asset Seller or other entity specified in the related prospectus
supplement. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related prospectus supplement, the Asset Seller or other
entity specified in the related prospectus supplement will be obligated, within
a specified number of days of receipt of such notice, to repurchase the related
Mortgage Loan from the Trustee at a price equal to the sum of the unpaid
principal balance thereof, plus unpaid accrued interest at the interest rate
for such Asset from the date as to which interest was last paid to the due date
in the Due Period in which the relevant purchase is to occur, plus certain
servicing expenses that are payable to the Servicer or such other price as
specified in the related prospectus supplement (the "PURCHASE PRICE") or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the Servicer nor the Depositor will be obligated to
repurchase or substitute for such Mortgage Loan if the Asset Seller or other
named entity defaults on its obligation. This repurchase or substitution
obligation constitutes the sole remedy available to the Securityholders or the
Trustee for omission of, or a material defect in, a constituent document. To
the extent specified in the related prospectus supplement, in lieu of curing
any omission or defect in the Asset or repurchasing or substituting for such
Asset, the Asset Seller or other named entity may agree to cover any losses
suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, the documents with respect
to First Lien Mortgage Loans, Home Equity Loans, Home Improvement Contracts and
Unsecured Home Improvement Loans will be delivered to the Trustee (or a
custodian) only to the extent specified in the related prospectus supplement.
Generally such documents will be retained by the Servicer, which may also be
the Asset Seller. In addition, assignments of the related Mortgages to the
Trustee will be recorded only to the extent specified in the related prospectus
supplement.
With respect to each Contract, the Servicer (which may also be the Asset
Seller) generally will maintain custody of the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. In order to give notice of the
right, title and interest of the Trustee in the Contracts, the Depositor will
cause UCC-1 financing statements to be authorized by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. The Contracts will be stamped or otherwise marked to reflect their
assignment from the Company to the Trust Fund only to the extent specified in
the related prospectus supplement. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Contracts."
While the Contract documents will not be reviewed by the Trustee or the
Servicer, if the Servicer finds that any such document is missing or defective
in any material respect, the Servicer will be required to immediately notify
the Depositor and the relevant Asset Seller or other entity specified in the
related prospectus supplement. If the Asset Seller or such other entity cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then the Asset Seller or such other entity will be obligated,
within a specified number of days of receipt of such notice, to repurchase the
related Contract from the Trustee at the Purchase Price or substitute for such
Contract. There can be no assurance that an Asset Seller or such other entity
will fulfill this repurchase or substitution obligation, and neither the
Servicer nor the Depositor will be obligated to repurchase or substitute for
such Contract if the Asset Seller or such other entity defaults on its
obligation. This repurchase or substitution obligation constitutes the sole
remedy available to the Securityholders or the Trustee for omission of, or a
material defect in, a constituent document. To the
49
extent specified in the related prospectus supplement, in lieu of curing any
omission or defect in the Asset or repurchasing or substituting for such Asset,
the Asset Seller may agree to cover any losses suffered by the Trust Fund as a
result of such breach or defect.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the related prospectus supplement the Depositor
will, with respect to each Asset, make or assign certain representations and
warranties, as of a specified date (the person making such representations and
warranties including the Depositor, the "WARRANTING PARTY") covering, by way of
example, the following types of matters:
o the accuracy of the information set forth for such Asset on the schedule
of Assets appearing as an exhibit to the applicable Agreement;
o in the case of a Mortgage Loan, the existence of title insurance insuring
the lien priority of the Mortgage Loan and, in the case of a Contract,
that the Contract creates a valid first security interest in or lien on
the related Manufactured Home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a Mortgage Loan, the existence of customary provisions in
the related Mortgage Note and Mortgage to permit realization against the
Mortgaged Property of the benefit of the security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on the
Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date prior to the applicable Cut-off Date. A substantial period of
time may have elapsed between such date and the date of initial issuance of the
related Series of Securities evidencing an interest in such Asset. In the event
of a breach of any such representation or warranty, the Warranting Party will
be obligated to reimburse the Trust Fund for losses caused by any such breach
or either cure such breach or repurchase or replace the affected Asset as
described below. Since the representations and warranties may not address
events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of such a representation and warranty
only if the relevant event that causes such breach occurs prior to such date.
Such party would have no such obligations if the relevant event that causes
such breach occurs after such date.
Each Agreement will provide that the Servicer and/or Trustee or such other
entity identified in the related prospectus supplement will be required to
notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of an Asset that materially
and adversely affects the value of such Asset or the interests therein of the
Securityholders. If such Warranting Party cannot cure such breach within a
specified period following the date on which such party was notified of such
breach, then such Warranting Party will be obligated to repurchase such Asset
from the Trustee within a specified period from the date on which the
Warranting Party was notified of such breach, at the Purchase Price therefor.
If so provided in the prospectus supplement for a Series, a Warranting Party,
rather than repurchase an Asset as to which a breach has occurred, will have
the option, within a specified period after initial issuance of such Series of
Securities, to cause the removal of such Asset from the Trust Fund and
substitute in its place one or more other Assets, as applicable, in accordance
with the standards described in the related prospectus supplement. If so
provided in the prospectus supplement for a Series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the Trust Fund or the Securityholders for any
losses caused by such breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to Securityholders or the
Trustee for a breach of representation by a Warranting Party.
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Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Servicer will be obligated to purchase or substitute for an
Asset if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to the Assets.
A Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
applicable Agreement. A breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders and which
continues unremedied for the number of days specified in the applicable
Agreement after the giving of written notice of such breach to the Servicer by
the Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee
by the holders of Securities evidencing not less than 25% of the Voting Rights
or such other percentage specified in the related prospectus supplement, will
constitute an Event of Default under such Agreement. See "-- Events of Default
under the Agreements" and "-- Rights Upon Event of Default under the
Agreements."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General. The Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "COLLECTION ACCOUNT"), which must be either (i) an account
or accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Securityholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior
to the claims of any other depositors or general creditors of the institution
with which the Collection Account is maintained or (ii) otherwise maintained
with a bank or trust company, and in a manner, satisfactory to the Rating
Agency or Agencies rating any Class of Securities of such Series. The
collateral eligible to secure amounts in the Collection Account is limited to
United States government securities and other investment grade obligations
specified in the applicable Agreement ("PERMITTED INVESTMENTS"). A Collection
Account may be maintained as an interest bearing or a non-interest bearing
account and the funds held therein may be invested pending each succeeding
Distribution Date in certain short-term Permitted Investments. Unless otherwise
specified in the applicable prospectus supplement, any interest or other income
earned on funds in the Collection Account will be paid to the Servicer or its
designee as additional servicing compensation. The Collection Account may be
maintained with an institution that is an affiliate of the Servicer, if
applicable, provided that such institution meets the standards imposed by the
Rating Agency or Agencies. If permitted by the Rating Agency or Agencies, a
Collection Account may contain funds relating to more than one Series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Servicer or serviced or master
serviced by it on behalf of others.
Deposits. A Servicer or the Trustee will deposit or cause to be deposited
in the Collection Account for one or more Trust Funds on a daily basis, or such
other period provided in the applicable Agreement, the following payments and
collections received, or advances made, by the Servicer or the Trustee or on
its behalf subsequent to the Cut-off Date (other than payments due on or before
the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
o all payments on account of principal, including principal prepayments, on
the Assets;
o all payments on account of interest on the Assets, including any default
interest collected, in each case net of any portion thereof retained by a
Servicer as its servicing compensation and net of any Retained Interest;
o Liquidation Proceeds and Insurance Proceeds, together with the net
proceeds on a monthly basis with respect to any Assets acquired for the
benefit of Securityholders;
o any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related Series of Securities as
described under "Description of Credit Support";
51
o any advances made as described under "Description of the Securities --
Advances in Respect of Delinquencies";
o any amounts paid under any Cash Flow Agreement, as described under
"Description of the Trust Funds -- Cash Flow Agreements";
o all proceeds of any Asset or, with respect to a Mortgage Loan, property
acquired in respect thereof purchased by the Depositor, any Asset Seller
or any other specified person as described under "-- Assignment of
Assets; Repurchases" and "-- Representations and Warranties;
Repurchases," all proceeds of any defaulted Mortgage Loan purchased as
described under "-- Realization Upon Defaulted Assets," and all proceeds
of any Asset purchased as described under "Description of the Securities
-- Termination";
o any amounts paid by a Servicer to cover certain interest shortfalls
arising out of the prepayment of Assets in the Trust Fund as described
under "Description of the Agreements -- Retained Interest; Servicing
Compensation and Payment of Expenses";
o to the extent that any such item does not constitute additional servicing
compensation to a Servicer, any payments on account of modification or
assumption fees, late payment charges or Prepayment Premiums on the
Assets;
o all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance Policies";
o any amount required to be deposited by a Servicer or the Trustee in
connection with losses realized on investments for the benefit of the
Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
o any other amounts required to be deposited in the Collection Account as
provided in the applicable Agreement and described in the related
prospectus supplement.
Withdrawals. A Servicer or the Trustee may, from time to time, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
o to make distributions to the Securityholders on each Distribution Date;
o to reimburse a Servicer for unreimbursed amounts advanced as described
under "Description of the Securities -- Advances in Respect of
Delinquencies," such reimbursement to be made out of amounts received
which were identified and applied by the Servicer as late collections of
interest (net of related servicing fees and Retained Interest) on and
principal of the particular Assets with respect to which the advances
were made or out of amounts drawn under any form of Credit Support with
respect to such Assets;
o to reimburse a Servicer for unpaid servicing fees earned and certain
unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect thereof, such reimbursement to be made out
of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Assets and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of Credit Support with respect to such Assets and properties;
o to reimburse a Servicer for any advances described above and any
servicing expenses described above which, in the Servicer's good faith
judgment, will not be recoverable from the amounts described in such
clauses, such reimbursement to be made from amounts collected on other
Assets or, if and to the extent so provided by the applicable Agreement
and described in the related prospectus supplement, just from that
portion of amounts collected on other Assets that is otherwise
distributable on one or more Classes of Subordinate Securities, if any,
remain outstanding, and otherwise any outstanding Class of Securities, of
the related Series;
52
o if and to the extent described in the related prospectus supplement, to
pay a Servicer interest accrued on the advances described above and the
servicing expenses described above while such advances and servicing
expenses remain outstanding and unreimbursed;
o to reimburse a Servicer, the Depositor, or any of their respective
directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "-- Certain Matters Regarding Servicers, the
Master Servicer and the Depositor";
o if and to the extent described in the related prospectus supplement, to
pay (or to transfer to a separate account for purposes of escrowing for
the payment of) the Trustee's fees;
o to reimburse the Trustee or any of its directors, officers, employees and
agents, as the case may be, for certain expenses, costs and liabilities
incurred thereby, as and to the extent described under "-- Certain
Matters Regarding the Trustee";
o to pay a Servicer, as additional servicing compensation, interest and
investment income earned in respect of amounts held in the Collection
Account;
o to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Servicer as
recoveries of Retained Interest;
o to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the
benefit of Securityholders by foreclosure or by deed in lieu of
foreclosure or otherwise, such payments to be made out of income received
on such property;
o if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC or a FASIT, to pay any federal,
state or local taxes imposed on the Trust Fund or its assets or
transactions, as and to the extent described under "Federal Income Tax
Consequences -- REMICs -- Taxes That May Be Imposed on the REMIC Pool" or
in the applicable prospectus supplement, respectively;
o to pay for the cost of an independent appraiser or other expert in real
estate matters retained to determine a fair sale price for a defaulted
Mortgage Loan or a property acquired in respect thereof in connection
with the liquidation of such Mortgage Loan or property;
o to pay for the cost of various opinions of counsel obtained pursuant to
the applicable Agreement for the benefit of Securityholders;
o to pay for the costs of recording the applicable Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any
breach of representation or warranty under the applicable Agreement;
o to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset
after its removal from the Trust Fund whether by reason of purchase or
substitution as contemplated by "--Assignment of Assets; Repurchase" and
"--Representations and Warranties; Repurchases" or otherwise;
o to make any other withdrawals permitted by the applicable Agreement; and
o to clear and terminate the Collection Account at the termination of the
Trust Fund.
Other Collection Accounts. Notwithstanding the foregoing, if so specified
in the related prospectus supplement, the applicable Agreement for any Series
of Securities may provide for the establishment and maintenance of a separate
collection account into which the Servicer will deposit on a daily basis the
amounts described under "-- Deposits" above for one or more Series of
Securities. Any amounts on deposit in any such collection account will be
withdrawn therefrom and deposited into the appropriate Collection Account by a
time specified in the related prospectus supplement. To the extent specified in
the related prospectus supplement, any amounts which could be withdrawn
53
from the Collection Account as described under "-- Withdrawals" above, may also
be withdrawn from any such collection account. The prospectus supplement will
set forth any restrictions with respect to any such collection account,
including investment restrictions and any restrictions with respect to
financial institutions with which any such collection account may be
maintained.
Collection and Other Servicing Procedures. The Servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed such collection procedures as it would
follow with respect to assets that are comparable to the Assets and held for
its own account, provided such procedures are consistent with (i) the terms of
the applicable Agreement and any related hazard insurance policy or instrument
of Credit Support, if any, included in the related Trust Fund described herein
or under "Description of Credit Support," (ii) applicable law and (iii) the
general servicing standard specified in the related prospectus supplement or,
if no such standard is so specified, its normal servicing practices (in either
case, the "SERVICING STANDARD"). In connection therewith, the Servicer will be
permitted in its discretion to waive any late payment charge or penalty
interest in respect of a late payment on an Asset.
Each Servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described herein and in any related prospectus supplement, and
filing and settling claims thereunder; maintaining, to the extent required by
the applicable Agreement, escrow or impoundment accounts of obligors for
payment of taxes, insurance and other items required to be paid by any obligor
pursuant to the terms of the Assets; processing assumptions or substitutions in
those cases where the Servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or Manufactured
Homes under certain circumstances; and maintaining accounting records relating
to the Assets. The Servicer or such other entity specified in the related
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of Credit Support.
See "Description of Credit Support."
The Servicer may agree to modify, waive or amend any term of any Asset in
a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (i) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (ii) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due thereon. The Servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if, unless otherwise provided in the related
prospectus supplement, (i) in its judgment, a material default on the Asset has
occurred or a payment default is reasonably foreseeable and (ii) in its
judgment, such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. The Servicer is required to notify the Trustee in the
event of any modification, waiver or amendment of any Asset.
In the case of Multifamily Mortgage Loans, a mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the Mortgage Loan debt, or may reflect the diversion of that income
from the servicing of the Mortgage Loan debt. In addition, a mortgagor under a
Multifamily Mortgage Loan that is unable to make Mortgage Loan payments may
also be unable to make timely payment of all required taxes and otherwise to
maintain and insure the related Mortgaged Property. In general, the Servicer
will be required to monitor any Multifamily Loan that is in default, evaluate
whether the causes of the default can be corrected over a reasonable period
without significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the mortgagor if cure is likely,
inspect the related Multifamily Property and take such other actions as are
consistent with the applicable Agreement. A significant period of time may
elapse before the Servicer is able to assess the success of any such corrective
action or the need for additional initiatives. The time within which the
Servicer can make the initial determination of appropriate action, evaluate the
success of corrective action, develop additional initiatives, institute
foreclosure proceedings and actually foreclose may vary considerably depending
on the particular Multifamily Mortgage Loan, the Multifamily Property, the
mortgagor, the presence of an acceptable party to assume the Multifamily
Mortgage Loan and the laws of the jurisdiction in which the Multifamily
Property is located.
54
REALIZATION UPON DEFAULTED ASSETS
Generally, the Servicer is required to monitor any Assets which is in
default, initiate corrective action in cooperation with the mortgagor or
obligor if cure is likely, inspect the Asset and take such other actions as are
consistent with the Servicing Standard. A significant period of time may elapse
before the Servicer is able to assess the success of such corrective action or
the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Mortgage Loans or
Contracts may grant to the Servicer and/or the holder or holders of certain
Classes of Securities a right of first refusal to purchase from the Trust Fund
at a predetermined purchase price any such Mortgage Loan or Contract as to
which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in
the related prospectus supplement. The related prospectus supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under "--Representations and
Warranties; Repurchases."
If so specified in the related prospectus supplement, the Servicer may
offer to sell any defaulted Mortgage Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a
greater recovery on a present value basis than would liquidation through
foreclosure, repossession or similar proceedings. The applicable Agreement will
provide that any such offering be made in a commercially reasonable manner for
a specified period and that the Servicer accept the highest cash bid received
from any person (including itself, an affiliate of the Servicer or any
Securityholder) that constitutes a fair price for such defaulted Mortgage Loan
or Contract. In the absence of any bid determined in accordance with the
applicable Agreement to be fair, the Servicer shall proceed with respect to
such defaulted Mortgage Loan or Contract as described below. Any bid in an
amount at least equal to the Purchase Price described under "-- Representations
and Warranties; Repurchases" will in all cases be deemed fair.
The Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Mortgage Loan by operation of law or otherwise and may at
any time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Mortgage Loan or
Contract has occurred or, in the Servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a Trust Fund as to which
a REMIC election has been made, the Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property by the close of the third calendar
year after the year of acquisition, unless (i) the Internal Revenue Service
(the "IRS") grants an extension of time to sell such property or (ii) the
Trustee receives an opinion of independent counsel to the effect that the
holding of the property by the Trust Fund subsequent to two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Securities are outstanding. Subject to the foregoing, the Servicer
will be required to (i) solicit bids for any Mortgaged Property so acquired in
such a manner as will be reasonably likely to realize a fair price for such
property and (ii) accept the first (and, if multiple bids are contemporaneously
received, the highest) cash bid received from any person that constitutes a
fair price. The applicability of these limitations if a FASIT election is made
with respect to all or a part of the Trust Fund will be described in the
applicable prospectus supplement.
The limitations imposed by the applicable Agreement and the REMIC
provisions or the FASIT provisions of the Code (if a REMIC election or a FASIT
election, respectively, has been made with respect to the related Trust Fund)
on the ownership and management of any Mortgaged Property acquired on behalf of
the Trust Fund may result in the recovery of an amount less than the amount
that would otherwise be recovered. See "Certain Legal Aspects of Mortgage Loans
- -- Foreclosure."
55
If recovery on a defaulted Asset under any related instrument of Credit
Support is not available, the Servicer nevertheless will be obligated to follow
or cause to be followed such normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued
thereon at the applicable interest rate, plus the aggregate amount of expenses
incurred by the Servicer in connection with such proceedings and which are
reimbursable under the applicable Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Servicer will be entitled to withdraw or
cause to be withdrawn from the Collection Account out of the Liquidation
Proceeds recovered on any defaulted Asset, prior to the distribution of such
Liquidation Proceeds to Securityholders, amounts representing its normal
servicing compensation on the Security, unreimbursed servicing expenses
incurred with respect to the Asset and any unreimbursed advances of delinquent
payments made with respect to the Asset.
If any property securing a defaulted Asset is damaged, the Servicer is not
required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to
Securityholders on liquidation of the Asset after reimbursement of the Servicer
for its expenses and (ii) that such expenses will be recoverable by it from
related Insurance Proceeds or Liquidation Proceeds.
As servicer of the Assets, a Servicer, on behalf of itself, the Trustee
and the Securityholders, will present claims to the obligor under each
instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Assets.
If a Servicer or its designee recovers payments under any instrument of
Credit Support with respect to any defaulted Assets, the Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out
of such proceeds, prior to distribution thereof to Securityholders, amounts
representing its normal servicing compensation on such Asset, unreimbursed
servicing expenses incurred with respect to the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "-- Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
Mortgage Loans. Generally, each Agreement for a Trust Fund comprised of
Mortgage Loans will require the Servicer to cause the mortgagor on each
Mortgage Loan to maintain a hazard insurance policy providing for such coverage
as is required under the related Mortgage or, if any Mortgage permits the
holder thereof to dictate to the mortgagor the insurance coverage to be
maintained on the related Mortgaged Property, then such coverage as is
consistent with the Servicing Standard. Such coverage will be in general in an
amount equal to the lesser of the principal balance owing on such Mortgage Loan
(but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or such other amount specified
in the related prospectus supplement. The ability of the Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent upon
its being named as an additional insured under any hazard insurance policy and
under any other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by mortgagors. All amounts collected by
the Servicer under any such policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and Mortgage Note) will be
deposited in the Collection Account. The applicable Agreement may provide that
the Servicer may satisfy its obligation to cause each mortgagor to maintain
such a hazard insurance policy by the Servicer's maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
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In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry
rot, vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Mortgage Loans will typically contain a coinsurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Mortgage Loans will require
the Servicer to cause the mortgagor on each Mortgage Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Servicer in maintaining any such insurance policy
will be added to the amount owing under the Mortgage Loan where the terms of
the Mortgage Loan so permit; provided, however, that the addition of such cost
will not be taken into account for purposes of calculating the distribution to
be made to Securityholders. Such costs may be recovered by the Servicer from
the Collection Account, with interest thereon, as provided by the applicable
Agreement.
Under the terms of the Mortgage Loans, mortgagors will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The Servicer, on behalf of the
Trustee and Securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the Mortgage Loans. However, the ability of the
Servicer to present or cause to be presented such claims is dependent upon the
extent to which information in this regard is furnished to the Servicer by
mortgagors.
CONTRACTS
Generally, the terms of the applicable Agreement for a Trust Fund
comprised of Contracts will require the Servicer to cause to be maintained with
respect to each Contract one or more hazard insurance policies which provide,
at a minimum, the same coverage as a standard form fire and extended coverage
insurance policy that is customary for manufactured housing, issued by a
company authorized to issue such policies in the state in which the
Manufactured Home is located, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the obligor on the related Contract, whichever is less; provided, however,
that the amount of coverage provided by each such hazard insurance policy shall
be sufficient to avoid the application of any co-insurance clause contained
therein. When a Manufactured Home's location was, at the time of origination of
the related Contract, within a federally designated special flood hazard area,
the Servicer shall cause such flood insurance to be maintained, which coverage
shall be at least equal to the minimum amount specified in the preceding
sentence or such lesser amount as may be available under the federal flood
insurance program. Each hazard insurance policy caused to be maintained by the
Servicer shall contain a standard loss payee clause in favor of the Servicer
and its
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successors and assigns. If any obligor is in default in the payment of premiums
on its hazard insurance policy or policies, the Servicer shall pay such
premiums out of its own funds, and may add separately such premium to the
obligor's obligation as provided by the Contract, but may not add such premium
to the remaining principal balance of the Contract.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the obligor
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the obligor's
interest in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies. The Servicer shall pay the premium for
such blanket policy on the basis described therein and shall pay any deductible
amount with respect to claims under such policy relating to the Contracts.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the Servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination thereof insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the Servicer. The applicable Agreement will allow the Servicer to
self-insure against loss occasioned by the errors and omissions of the
officers, employees and agents of the Servicer so long as certain criteria set
forth in such Agreement are met.
DUE-ON-SALE PROVISIONS
The Mortgage Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
Mortgage Loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The Servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the Servicer will not take any action in relation to
the enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. Any fee collected by
or on behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of Mortgage Loans -- Due-on-Sale Clauses." The
Contracts may also contain such clauses. The Servicer will generally permit
such transfer so long as the transferee satisfies the Servicer's then
applicable underwriting standards. The purpose of such transfers is often to
avoid a default by the transferring obligor. See "Certain Legal Aspects of the
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses."
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a Series of Securities will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the applicable
Agreement. A "RETAINED INTEREST" in an Asset represents a specified portion of
the interest payable thereon. The Retained Interest will be deducted from
mortgagor payments as received and will not be part of the related Trust Fund.
The Servicer's primary servicing compensation with respect to a Series of
Securities will come from the periodic payment to it of a portion of the
interest payment on each Asset or such other amount specified in the related
prospectus supplement. Since any Retained Interest and a Servicer's primary
compensation are percentages of the principal balance of each Asset, such
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement with respect to a Series of Securities evidencing
interests in a Trust Fund that includes Mortgage Loans or Contracts may provide
that, as additional compensation, the Servicer may retain all or a portion of
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assumption fees, modification fees, late payment charges or Prepayment Premiums
collected from mortgagors and any interest or other income which may be earned
on funds held in the Collection Account or any account established by a
Servicer pursuant to the applicable Agreement.
The Servicer may, to the extent provided in the related prospectus
supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and
independent accountants, payment of expenses incurred in connection with
distributions and reports to Securityholders, and payment of any other expenses
described in the related prospectus supplement. Certain other expenses,
including certain expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the related prospectus supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related prospectus supplement, the
Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Assets in the related
Trust Fund during such period prior to their respective due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Mortgage Loans or
Contracts will provide that on or before a specified date in each year, a firm
of independent public accountants will furnish a statement to the Trustee to
the effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or such other program used by the Servicer, the servicing by or on behalf of
the Servicer of mortgage loans under agreements substantially similar to each
other (including the applicable Agreement) was conducted in compliance with the
terms of such agreements or such program except for any significant exceptions
or errors in records that, in the opinion of the firm, either the Audit Program
for Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or such other program, requires it to
report.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Servicer to the effect that the Servicer has fulfilled its
obligations under the applicable Agreement throughout the preceding calendar
year or other specified twelve-month period.
Copies of such annual accountants' statement and such statements of
officers will be obtainable by Securityholders without charge upon written
request to the Servicer or other entity specified in the related prospectus
supplement at the address set forth in the related prospectus supplement.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE DEPOSITOR
The Servicers and Master Servicer, if any, under each Agreement will be
named in the related prospectus supplement. The entities serving as Servicer or
Master Servicer may be affiliates of the Depositor and may have other normal
business relationships with the Depositor or the Depositor's affiliates.
Reference herein to the Servicer shall be deemed to be to the Master Servicer,
if applicable.
The applicable Agreement will provide that the Servicer may resign from
its obligations and duties thereunder only upon a determination that its duties
under such Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Servicer so causing such a conflict being
of a type and nature carried on by the Servicer at the date of such Agreement.
No such resignation will become effective until the Trustee or a successor
servicer has assumed the Servicer's obligations and duties under the applicable
Agreement.
Each Agreement will further provide that neither any Servicer, the
Depositor nor any director, officer, employee, or agent of a Servicer or the
Depositor will be under any liability to the related
59
Trust Fund or Securityholders for any action taken, or for refraining from the
taking of any action, in good faith pursuant to the applicable Agreement;
provided, however, that neither a Servicer, the Depositor nor any such person
will be protected against any breach of a representation, warranty or covenant
made in such Agreement, or against any liability specifically imposed thereby,
or against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that any Servicer, the
Depositor and any director, officer, employee or agent of a Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the applicable Agreement or the
Securities; provided, however, that such indemnification will not extend to any
loss, liability or expense
o specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case
of a Servicer, the prosecution of an enforcement action in respect of any
specific Mortgage Loan or Mortgage Loans or Contract or Contracts (except
as any such loss, liability or expense shall be otherwise reimbursable
pursuant to such Agreement);
o incurred in connection with any breach of a representation, warranty or
covenant made in such Agreement;
o incurred by reason of misfeasance, bad faith or gross negligence in the
performance of obligations or duties thereunder, or by reason of reckless
disregard of such obligations or duties;
o incurred in connection with any violation of any state or federal
securities law; or
o imposed by any taxing authority if such loss, liability or expense is not
specifically reimbursable pursuant to the terms of the applicable
Agreement.
In addition, each Agreement will provide that neither any Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its respective responsibilities under
the applicable Agreement and which in its opinion may involve it in any expense
or liability. Any such Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the applicable Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Servicer or the Depositor is a party, or any person succeeding to the
business of the Servicer or the Depositor, will be the successor of the
Servicer or the Depositor, as the case may be, under the applicable Agreement.
SPECIAL SERVICERS
If and to the extent specified in the related prospectus supplement, a
special servicer (a "SPECIAL SERVICER") may be a party to the applicable
Agreement or may be appointed by the Servicer or another specified party to
perform certain specified duties in respect of servicing the related Mortgage
Loans that would otherwise be performed by the Servicer, such as the workout
and/or foreclosure of defaulted Mortgage Loans. The rights and obligations of
any Special Servicer will be specified in the related Agreement The Servicer
will be liable for the performance of a Special Servicer only if, and to the
extent, set forth in such Agreement.
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EVENTS OF DEFAULT UNDER THE AGREEMENTS
Events of default under the applicable Agreement will generally include:
o any failure by the Servicer to distribute or cause to be distributed to
Securityholders, or to remit to the Trustee for distribution to
Securityholders, any required payment that continues after a grace
period, if any;
o any failure by the Servicer duly to observe or perform in any material
respect any of its other covenants or obligations under the applicable
Agreement which continues unremedied for 30 days after written notice of
such failure has been given to the Servicer by the Trustee or the
Depositor, or to the Servicer, the Depositor and the Trustee by
Securityholders evidencing not less than 25% of the Voting Rights;
o any breach of a representation or warranty made by the Servicer under the
applicable Agreement which materially and adversely affects the interests
of Securityholders and which continues unremedied for 30 days after
written notice of such breach has been given to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the
Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights; and
o certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the Servicer indicating its insolvency or inability to pay its
obligations.
Material variations to the foregoing events of default (other than to shorten
cure periods or eliminate notice requirements) will be specified in the related
prospectus supplement. The Trustee will, not later than the later of 60 days or
such other period specified in the related prospectus supplement after the
occurrence of any event which constitutes or, with notice or lapse of time or
both, would constitute an event of default and five days after certain officers
of the Trustee become aware of the occurrence of such an event, transmit by
mail to the Depositor and all Securityholders of the applicable Series notice
of such occurrence, unless such default shall have been cured or waived.
The manner of determining the "Voting Rights" of a Security or Class or
Classes of Securities will be specified in the related prospectus supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage speci.ed in the related
prospectus supplement) of the Voting Rights, the Trustee shall terminate all of
the rights and obligations of the Servicer under the applicable Agreement and in
and to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the applicable
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the related
prospectus supplement so specifies, then the Trustee will not be obligated to
make such advances) and will be entitled to similar compensation arrangements.
In the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage speci.ed in the related prospectus supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related prospectus supplement) to act as
successor to the Servicer under the applicable Agreement. Pending such
appointment, the Trustee is obligated to act in such capacity. The Trustee and
any such successor may agree upon the servicing compensation to be paid, which
in no event may be greater than the compensation payable to the Servicer under
the applicable Agreement.
The holders of Securities representing at least 662.3% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
allocated to the respective Classes of Securities
61
affected by any event of default will be entitled to waive such event of
default; provided, however, that an Event of Default involving a failure to
distribute a required payment to Securityholders described in the first bullet
point above under "-- EVENTS OF DEFAULT UNDER THE AGREEMENTS" may be waived only
by all of the Securityholders. Upon any such waiver of an event of default, such
event of default shall cease to exist and shall be deemed to have been remedied
for every purpose under the applicable Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage speci.ed in the related
prospectus supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
(or such other number of days speci.ed in the related prospectus supplement) has
neglected or refused to institute any such proceeding. The Trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Securityholders covered by such
Agreement, unless such Securityholders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any Securityholders covered by the applicable Agreement,
o to cure any ambiguity or mistake,
o to correct, modify or supplement any provision therein which may be
inconsistent with any other provision therein or with the related
prospectus supplement,
o to make any other provisions with respect to matters or questions arising
under the applicable Agreement which are not materially inconsistent with
the provisions thereof, provided that, such amendment pursuant to this
clause will not adversely affect in any material respect the interests of
any Securityholders covered by the applicable Agreement as evidenced
either by an opinion of counsel to such effect or the delivery to the
Trustee of written notification from each Rating Agency that provides, at
the request of the Depositor, a rating for the Offered Securities of the
related Series to the effect that such amendment or supplement will not
cause such Rating Agency to lower or withdraw the then current rating
assigned to such Securities; or
o to comply with any requirements imposed by the Code.
Each Agreement may also be amended by the Depositor, the Servicer, if any, and
the Trustee, with the consent of the Securityholders affected thereby
evidencing not less than 51% (or such other percentage specified in the related
prospectus supplement) of the Voting Rights, for any purpose; provided,
however, no such amendment may (i) reduce in any manner the amount of, or delay
the timing of, payments received or advanced on Assets which are required to be
distributed on any Security without the consent of the Securityholder or (ii)
reduce the consent percentages described in this paragraph without the consent
of all the Securityholders covered by such Agreement then outstanding. However,
with respect to any Series of Securities as to which a REMIC election or a
FASIT election is to be made, the Trustee will not consent to any amendment of
the applicable Agreement unless it shall first have received an opinion of
counsel to the effect that such amendment will not result in the imposition of
a tax on the related Trust Fund or cause the related Trust Fund to fail to
qualify as a REMIC or a FASIT, as the case may be, at any time that the related
Securities are outstanding.
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THE TRUSTEE
The Trustee under each Agreement will be named in the related prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as Trustee may have a banking relationship
with the Depositor and its affiliates, with any Servicer and its affiliates and
with any Master Servicer and its affiliates. If so specified in the related
prospectus supplement with respect to certain Series of Securities, a
certificate administrator will perform certain duties and functions normally
performed by the Trustee. Any certificate administrator will be a party to the
applicable Agreement and will be named in the applicable prospectus supplement.
Any certificate administrator will have obligations and rights similar to the
Trustee as described in this prospectus. The commercial bank, national banking
association, banking corporation or trust company serving as certificate
administrator may have a banking relationship with the Depositor and its
affiliates, with any Servicer and its affiliates and with any Master Servicer
and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities or any Asset or related document and is not
accountable for the use or application by or on behalf of any Servicer of any
funds paid to the Master Servicer or its designee in respect of the Securities
or the Assets, or deposited into or withdrawn from the Collection Account or
any other account by or on behalf of the Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those
duties specifically required under the applicable Agreement, as applicable.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee is required to examine such
documents and to determine whether they conform to the requirements of the
applicable Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee and any director, officer, employee or agent of the Trustee
shall be entitled to indemnification out of the Collection Account for any
loss, liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's
o enforcing its rights and remedies and protecting the interests, of the
Securityholders during the continuance of an Event of Default,
o defending or prosecuting any legal action in respect of the applicable
Agreement or Series of Securities,
o being the mortgagee of record with respect to the Mortgage Loans in a
Trust Fund and the owner of record with respect to any Mortgaged Property
acquired in respect thereof for the benefit of Securityholders, or
o acting or refraining from acting in good faith at the direction of the
holders of the related Series of Securities entitled to not less than 25%
(or such other percentage as is specified in the applicable Agreement
with respect to any particular matter) of the Voting Rights for such
Series.
Any such indemnification of the Trustee discussed above will not extend to any
loss, liability or expense that constitutes a specific liability of the Trustee
pursuant to the applicable Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under
an Agreement by giving written notice thereof to the Depositor, the Servicer,
if any, and all Securityholders. Upon receiving
63
such notice of resignation, the Depositor is required promptly to appoint a
successor trustee acceptable to the Servicer, if any. If no successor trustee
shall have been so appointed and have accepted appointment within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the applicable Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any Class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Securityholders of any Series entitled to at least 51% (or such other
percentage specified in the related prospectus supplement) of the Voting Rights
for such Series may at any time remove the Trustee without cause and appoint a
successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may appear in
each Indenture. The prospectus supplement for a Series of Notes will describe
any provision of the Indenture relating to such Series that materially differs
from the description thereof contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Indenture for a Series of Notes.
A form of an Indenture has been filed as an exhibit to the Registration
Statement of which this prospectus is a part. The Depositor will provide a copy
of the Indenture (without exhibits) relating to any Series of Notes without
charge upon written request of a Securityholder of such Series addressed to
Wachovia Asset Securitization, Inc., 8739 Research Drive, NC0121-Suite D,
Charlotte, North Carolina 28288-0121, Attention: Vice President.
Events of Default
Events of default under the Indenture for each Series of Notes will
generally include:
o a default for thirty (30) days (or such other number of days specified in
such prospectus supplement) or more in the payment of any principal of or
interest on any Note of such Series;
o failure to perform any other covenant of the Depositor or the Trust Fund
in the Indenture which continues for a period of sixty (60) days (or such
other number of days specified in such prospectus supplement) after
notice thereof is given in accordance with the procedures described in
the related prospectus supplement;
o any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant
thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made,
and such breach is not cured within sixty (60) days (or such other number
of days specified in such prospectus supplement) after notice thereof is
given in accordance with the procedures described in the related
prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Trust Fund; or
o any other event of default provided with respect to Notes of that Series.
64
If an event of default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series may declare the principal amount (or, if the Notes of that
Series are Accrual Securities, such portion of the principal amount as may be
specified in the terms of that Series, as provided in the related prospectus
supplement) of all the Notes of such Series to be due and payable immediately.
Such declaration may, under certain circumstances, be rescinded and annulled by
the Securityholders of a majority in aggregate outstanding amount of the Notes
of such Series.
If, following an event of default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such Series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such Series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a Series following an event of default, other
than a default in the payment of any principal or interest on any Note of such
Series for thirty (30) days or more, unless (a) the Securityholders of 100% (or
such other percentage specified in the related prospectus supplement) of the
then aggregate outstanding amount of the Notes of such Series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the outstanding
Notes of such Series at the date of such sale or (c) the Indenture Trustee
determines that such collateral would not be sufficient on an ongoing basis to
make all payments on such Notes as such payments would have become due if such
Notes had not been declared due and payable, and the Indenture Trustee obtains
the consent of the Securityholders of 66 2/3% (or such other percentage
specified in the related prospectus supplement) of the then aggregate
outstanding amount of the Notes of such Series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days
(or such other number of days specified in the related prospectus supplement)
or more in the payment of principal of or interest on the Notes of a Series,
the Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result,
upon the occurrence of such an event of default, the amount available for
distribution to the Securityholders would be less than would otherwise be the
case. However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Securityholders
after the occurrence of such an event of default.
To the extent provided in the related prospectus supplement, in the event
the principal of the Notes of a Series is declared due and payable, as
described above, the Securityholders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an event of default shall occur and be continuing
with respect to a Series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Securityholders of such Series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the
Securityholders of a majority of the then aggregate outstanding amount of the
Notes of such Series shall have the right to direct the time, method and place
of conducting any proceeding for any remedy available to the Indenture Trustee
or exercising any trust or power conferred on the Indenture Trustee with
respect to the Notes of such Series, and the Securityholders of a majority of
the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto,
65
except a default in the payment of principal or interest or a default in
respect of a covenant or provision of the Indenture that cannot be modified
without the waiver or consent of all the Securityholders of the outstanding
Notes of such Series affected thereby.
DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to a Series of Notes (except
with respect to certain continuing rights specified in the Indenture) upon the
delivery to the Indenture Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Indenture Trustee of
funds sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect
of the Notes of such Series (except for certain obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of such Series, to replace stolen, lost or mutilated Notes of such
Series, to maintain paying agencies and to hold monies for payment in trust)
upon the deposit with the Indenture Trustee, in trust, of money and/or direct
obligations of or obligations guaranteed by the United States of America which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide money in an amount sufficient to pay the
principal of and each installment of interest on the Notes of such Series on
the maturity date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The Indenture Trustee for each Series of Notes will be required to mail
each year to all related Securityholders a brief report relating to its
eligibility and qualification to continue as Indenture Trustee under the
related Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by such Trust to
the applicable Indenture Trustee in its individual capacity, the property and
funds physically held by such Indenture Trustee as such and any action taken by
it that materially affects such Notes and that has not been previously
reported.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Notes will be specified in the
related prospectus supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Depositor will be obligated to appoint a
successor trustee for such Series. The Depositor may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if such Indenture Trustee becomes
insolvent. In such circumstances the Depositor will be obligated to appoint a
successor trustee for the applicable Series of Notes. Any resignation or
removal of the Indenture Trustee and appointment of a successor trustee for any
Series of Notes does not become effective until acceptance of the appointment
by the successor trustee for such Series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates, a Servicer or any of
its affiliates or the Master Servicer or any of its affiliates.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any Series of Securities, Credit Support may be provided with respect
to one or more Classes thereof or the related Assets. Credit Support may be in
the form of the subordination of one or more Classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more
reserve funds or another method of Credit Support described in the related
prospectus supplement, or any combination of the foregoing. If so provided in
the related prospectus supplement, any form of Credit Support may be structured
so as to be drawn upon by more than one Series to the extent described therein.
The coverage provided by any Credit Support will be described in the
related prospectus supplement. Generally, such coverage will not provide
protection against all risks of loss and will not guarantee repayment of the
entire Security Balance of the Securities and interest thereon. If losses or
shortfalls occur that exceed the amount covered by Credit Support or that are
not covered by Credit Support, Securityholders will bear their allocable share
of deficiencies. Moreover, if a form of Credit Support covers more than one
Series of Securities (each, a "COVERED TRUST"), Securityholders evidencing
interests in any of such Covered Trusts will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
If Credit Support is provided with respect to one or more Classes of
Securities of a Series, or the related Assets, the related prospectus
supplement will include a description of:
o the nature and amount of coverage under such Credit Support,
o any conditions to payment thereunder not otherwise described herein,
o the conditions, if any, under which the amount of coverage under such
Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and
o the material provisions relating to such Credit Support.
Additionally, the related prospectus supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including:
o a brief description of its principal business activities,
o its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business,
o if applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and
o its total assets, and its stockholders' or policyholders' surplus, if
applicable, as of the date specified in the prospectus supplement.
See "Risk Factors -- Risks Associated with the Securities -- Credit Enhancement
is Limited in Amount and Coverage."
SUBORDINATE SECURITIES
If so specified in the related prospectus supplement, one or more Classes
of Securities of a Series may be Subordinate Securities. To the extent
specified in the related prospectus supplement, the rights of the holders of
Subordinate Securities to receive distributions of principal and interest from
the Collection Account on any Distribution Date will be subordinated to such
rights of the holders of Senior Securities. If so provided in the related
prospectus supplement, the subordination of a Class may apply only in the event
of (or may be limited to) certain types of losses or shortfalls. The related
prospectus supplement will set forth information concerning the amount of
subordination of a Class or Classes of Subordinate Securities in a Series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected.
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CROSS-SUPPORT PROVISIONS
If the Assets for a Series are divided into separate groups, each
supporting a separate Class or Classes of Securities of a Series, Credit
Support may be provided by cross-support provisions requiring that
distributions be made on Senior Securities evidencing interests in one group of
Mortgage Loans prior to distributions on Subordinate Securities evidencing
interests in a different group of Mortgage Loans within the Trust Fund. The
prospectus supplement for a Series that includes a cross-support provision will
describe the manner and conditions for applying such provisions.
LIMITED GUARANTEE
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named therein.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
If so specified in the related prospectus supplement with respect to a
Series of Securities, credit enhancement may be provided in the form of a
financial guaranty insurance policy or a surety bond issued by an insurer named
therein.
LETTER OF CREDIT
Alternative credit support with respect to a Series of Securities may be
provided by the issuance of a letter of credit by the bank or financial
institution specified in the related prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of
credit issued with respect to a Series of Securities will be set forth in the
prospectus supplement relating to such Series.
POOL INSURANCE POLICIES
If so specified in the related prospectus supplement relating to a Series
of Securities, a pool insurance policy for the Mortgage Loans in the related
Trust Fund will be obtained. The pool insurance policy will cover any loss,
subject to the limitations described in the related prospectus supplement, by
reason of default to the extent a related Mortgage Loan is not covered by any
primary mortgage insurance policy. The amount and principal terms of any such
coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related prospectus supplement, a special hazard
insurance policy may also be obtained for the related Trust Fund in the amount
set forth in such prospectus supplement. The special hazard insurance policy
will, subject to the limitations described in the related prospectus
supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states, in which the Mortgaged Properties
are located. The amount and principal terms of any such coverage will be set
forth in the prospectus supplement.
MORTGAGOR BANKRUPTCY BOND
If so specified in the related prospectus supplement, losses resulting
from a bankruptcy proceeding relating to a mortgagor affecting the Mortgage
Loans in a Trust Fund with respect to a Series of Securities will be covered
under a mortgagor bankruptcy bond, or any other instrument that will not result
in a downgrading of the rating of the Securities of a Series by the Rating
Agency or Rating Agencies that rate such Series. Any mortgagor bankruptcy bond
or such other instrument will provide for coverage in an amount meeting the
criteria of the Rating Agency or Rating Agencies
68
rating the Securities of the related Series, which amount will be set forth in
the related prospectus supplement. The amount and principal terms of any such
coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain Classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such prospectus supplement. The
reserve funds for a Series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related prospectus supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Securities. If so specified in the related
prospectus supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the
conditions and to the extent specified in the related prospectus supplement and
will not be available for further application to the Securities.
Moneys deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the related prospectus supplement. To
the extent specified in the related prospectus supplement, any reinvestment
income or other gain from such investments will be credited to the related
reserve fund for such Series, and any loss resulting from such investments will
be charged to such reserve fund. However, such income may be payable to any
related Servicer or another service provider as additional compensation. To the
extent specified in the related prospectus supplement, the reserve fund, if
any, for a Series will not be a part of the Trust Fund.
Additional information concerning any reserve fund will be set forth in
the related prospectus supplement, including the initial balance of such
reserve fund, the balance required to be maintained in the reserve fund, the
manner in which such required balance will decrease over time, the manner of
funding such reserve fund, the purposes for which funds in the reserve fund may
be applied to make distributions to Securityholders and use of investment
earnings from the reserve fund, if any.
OVERCOLLATERALIZATION
If specified in the related prospectus supplement, subordination
provisions of a Trust Fund may be used to accelerate to a limited extent the
amortization of one or more Classes of Securities relative to the amortization
of the related Assets. The accelerated amortization is achieved by the
application of certain excess interest to the payment of principal of one or
more Classes of Securities. This acceleration feature creates, with respect to
the Assets or groups thereof, overcollateralization which results from the
excess of the aggregate principal balance of the related Assets, or a group
thereof, over the principal balance of the related Class or Classes of
Securities. Such acceleration may continue for the life of the related
Security, or may be limited. In the case of limited acceleration, once the
required level of overcollateralization is reached, and subject to certain
provisions specified in the related prospectus supplement, such limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do
not purport to be complete nor to reflect the laws of any particular state, nor
to encompass the laws of all states in which the security for the Mortgage
Loans is situated. The summaries are qualified in their entirety by reference
to the applicable federal and state laws governing the Mortgage Loans. See
"Description of the Trust Funds -- Assets."
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and
secured by instruments granting a security interest in real property which may
be mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages." Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the
instrument in the appropriate public recording office. However, recording does
not generally establish priority over governmental claims for real estate taxes
and assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -- a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a
deed of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this prospectus, unless the context otherwise requires, "mortgagor" includes
the trustor under a deed of trust and a grantor under a security deed or a deed
to secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by
the related mortgage note. In case the mortgagor under a mortgage is a land
trust, there would be an additional party because legal title to the property
is held by a land trustee under a land trust agreement for the benefit of the
mortgagor. At origination of a mortgage loan involving a land trust, the
mortgagor executes a separate undertaking to make payments on the mortgage
note. The mortgagee's authority under a mortgage, the trustee's authority under
a deed of trust and the grantee's authority under a deed to secure debt are
governed by the express provisions of the mortgage, the law of the state in
which the real property is located, certain federal laws (including, without
limitation, the Relief Act) and, in some cases, in deed of trust transactions,
the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the mortgagor assigns to the
lender the mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to
collect the rents for so long as there is no default. If the mortgagor
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber
70
other interests in real property such as a tenant's interest in a lease of land
or improvements, or both, and the leasehold estate created by such lease. An
instrument covering an interest in real property other than the fee estate
requires special provisions in the instrument creating such interest or in the
mortgage, deed of trust, security deed or deed to secure debt, to protect the
mortgagee against termination of such interest before the mortgage, deed of
trust, security deed or deed to secure debt is paid. The Depositor, the Asset
Seller or other entity specified in the related prospectus supplement will make
certain representations and warranties in the applicable Agreement or certain
representations and warranties will be assigned to the Trustee with respect to
any Mortgage Loans that are secured by an interest in a leasehold estate. Such
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement relating to a Series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
("COOPERATIVE LOANS") secured by security interests in shares issued by a
cooperative housing corporation (a "COOPERATIVE") and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the cooperatives' buildings. The security agreement
will create a lien upon, or grant a title interest in, the property which it
covers, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement in the
appropriate recording office. Such a lien or title interest is not prior to the
lien for real estate taxes and assessments and other charges imposed under
governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and,
in most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building or underlying land, as is generally the
case, or an underlying lease of the land, as is the case in some instances, the
Cooperative, as property mortgagor, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either
the construction or purchase of the Cooperative's apartment building or
obtaining of capital by the Cooperative. The interest of the occupant under
proprietary leases or occupancy agreements as to which that Cooperative is the
landlord are generally subordinate to the interest of the holder of a blanket
mortgage and to the interest of the holder of a land lease. If the Cooperative
is unable to meet the payment obligations (i) arising under a blanket mortgage,
the mortgagee holding a blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements or (ii)
arising under its land lease, the holder of the landlord's interest under the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity.
The inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual
tenant stockholder of cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or
71
ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights are financed through a Cooperative Loan evidenced by a
promissory note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
Cooperative shares. The lender generally takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "Foreclosure -- Cooperative Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"LAND SALE CONTRACT") the contract seller (hereinafter referred to as the
"CONTRACT LENDER") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "CONTRACT
BORROWER") for the payment of the purchase price, plus interest, over the term
of the Land Sale Contract. Only after full performance by the borrower of the
contract is the Contract Lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the
effective period of the Land Sale Contract, the Contract Borrower is
responsible for maintaining the property in good condition and for paying real
estate taxes, assessments and hazard insurance premiums associated with the
property.
The method of enforcing the rights of the Contract Lender under an
installment contract varies on a state-by-state basis depending upon the extent
to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to its terms. The terms of Land Sale
Contracts generally provide that upon default by the Contract Borrower, the
borrower loses his or her right to occupy the property, the entire indebtedness
is accelerated, and the buyer's equitable interest in the property is
forfeited. The Contract Lender in such a situation does not have to foreclose
in order to obtain title to the property, although in some cases a quiet title
action is in order if the Contract Borrower has filed the Land Sale Contract in
local land records and an ejectment action may be necessary to recover
possession. In a few states, particularly in cases of Contract Borrower default
during the early years of a Land Sale Contract, the courts will permit
ejectment of the buyer and a forfeiture of his or her interest in the property.
However, most state legislatures have enacted provisions by analogy to mortgage
law protecting borrowers under Land Sale Contracts from the harsh consequences
of forfeiture. Under such statues, a judicial contract may be reinstated upon
full payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
Contract Borrower with significant investment in the property under a Land Sale
Contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce
the forfeiture clause. Nevertheless, generally speaking, the Contract Lender's
procedures for obtaining possession and clear title under a Land Sale Contract
for the sale of real estate in a given state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining
clear title to a mortgaged property.
FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its
obligations under the note or mortgage, the mortgagee has the right to
institute foreclosure proceedings to sell the mortgaged property at public
auction to satisfy the indebtedness.
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Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may
require the lender to undertake affirmative and expensive actions to determine
the cause of the mortgagor's default and the likelihood that the mortgagor will
be able to reinstate the loan. In some cases, courts have substituted their
judgment for the lender's and have required that lenders reinstate loans or
recast payment schedules in order to accommodate mortgagors who are suffering
from a temporary financial disability. In other cases, courts have limited the
right of the lender to foreclose if the default under the mortgage is not
monetary, e.g., the mortgagor failed to maintain the mortgaged property
adequately or the mortgagor executed a junior mortgage on the mortgaged
property. The exercise by the court of its equity powers will depend on the
individual circumstances of each case presented to it. Finally, some courts
have been faced with the issue of whether federal or state constitutional
provisions reflecting due process concerns for adequate notice require that a
mortgagor receive notice in addition to statutorily-prescribed minimum notice.
For the most part, these cases have upheld the reasonableness of the notice
provisions or have found that a public sale under a mortgage providing for a
power of sale does not involve sufficient state action to afford constitutional
protections to the mortgagor.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such
sale, the trustee under a deed of trust must record a notice of default and
notice of sale and send a copy to the mortgagor and to any other party who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, in some states the trustee must provide notice to any other party
having an interest of record in the real property, including junior
lienholders. A notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. The
mortgagor or junior lienholder may then have the right, during a reinstatement
period required in some states, to cure the default by paying the entire actual
amount in arrears (without acceleration)
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plus the expenses incurred in enforcing the obligation. In other states, the
mortgagor or the junior lienholder is not provided a period to reinstate the
loan, but has only the right to pay off the entire debt to prevent the
foreclosure sale. Generally, the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time periods
are governed by state law and vary among the states. Foreclosure of a deed to
secure debt is also generally accomplished by a non-judicial sale similar to
that required by a deed of trust, except that the lender or its agent, rather
than a trustee, is typically empowered to perform the sale in accordance with
the terms of the deed to secure debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses which may be recovered by a lender. Thereafter, subject to the
mortgagor's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and
have both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be
recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by
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paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three calendar years
following the year the Trust Fund acquired the property. With respect to a
Series of Securities for which an election is made to qualify the Trust Fund or
a part thereof as a REMIC, the applicable Agreement will permit foreclosed
property to be held for more than such period of time if the IRS grants an
extension of time within which to sell such property or independent counsel
renders an opinion to the effect that holding such property for such additional
period is permissible under the REMIC Provisions. The applicability of these
limitations if a FASIT election is made with respect to all or a part of the
Trust Fund will be described in the applicable prospectus supplement.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and by-laws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on
a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary
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lease before transferring the Cooperative shares or assigning the proprietary
lease. Generally, the lender is not limited in any rights it may have to
dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale
be conducted in a "commercially reasonable" manner. Whether a foreclosure sale
has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in
payment to those of the holder of the senior mortgage or deed of trust,
including the prior rights of the senior mortgagee or beneficiary to receive
and apply hazard insurance and condemnation proceeds and, upon default of the
mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "-- Foreclosure" herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event
of a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the mortgagee
or beneficiary become part of the indebtedness secured by the mortgage or deed
of trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been
sold in accordance with a properly conducted foreclosure and foreclosure sale,
those having an interest which is subordinate to that of the foreclosing
mortgagee have an equity of redemption and may redeem the property by
76
paying the entire debt with interest. In addition, in some states, when a
foreclosure action has been commenced, the redeeming party must pay certain
costs of such action. Those having an equity of redemption must generally be
made parties and joined in the foreclosure proceeding in order for their equity
of redemption to be cut off and terminated.
The equity of redemption is a common-law (non-statutory) right which
exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the mortgagor and foreclosed junior lienors are given a statutory period in
which to redeem the property from the foreclosure sale. In some states,
statutory redemption may occur only upon payment of the foreclosure sale price.
In other states, redemption may be authorized if the former mortgagor pays only
a portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The
exercise of a right of redemption would defeat the title of any purchaser from
a foreclosure sale or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to maintain the property
and pay the expenses of ownership until the redemption period has expired. In
some states, a post-sale statutory right of redemption may exist following a
judicial foreclosure, but not following a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION, THE BANKRUPTCY CODE AND OTHER LIMITATIONS ON
LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other statutory
provisions limit any deficiency judgment against the former borrower following
a judicial sale to the excess of the outstanding debt over the fair market
value of the property at the time of the public sale. The purpose of these
statutes is generally to prevent a beneficiary or a mortgagee from obtaining a
large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "BANKRUPTCY CODE"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the court may be
reluctant to take, particularly if the debtor has the prospect of restructuring
his or her debts and the mortgage collateral is not deteriorating in value. The
delay and the consequences thereof caused by such automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by
a mortgage on the property) may stay a senior lender from taking action to
foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may "bid in" (i.e.,
bid up to the amount of the debt) at the sale of the asset. See "--
Foreclosure." A homeowner may also file for relief under Chapter 11 of the
bankruptcy code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner
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may file for relief under Chapter 13 of the Bankruptcy Code and address his or
her debts in a rehabilitation plan. Chapter 13 is often referred to as the
"wage earner chapter" or "consumer chapter" because most individuals seeking to
restructure their debts file for relief under Chapter 13 rather than under
Chapter 11.
The Bankruptcy Code permits a mortgage loan that is secured by property
that does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving the
lender as a general unsecured creditor for the difference between the value of
the collateral and the outstanding balance of the mortgage loan. A borrower's
unsecured indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may
include a reduction in the amount of each scheduled payment, which reduction
may result from a reduction in the rate of interest, an alteration of the
repayment schedule, an extension of the final maturity date, and/or a reduction
in the outstanding balance of the secured portion of the loan. In certain
circumstances, subject to the court's approval, a debtor in a case under
Chapter 11 of the Bankruptcy Code may have the power to grant liens senior to
the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
with respect to a mortgage loan on such debtor's residence by paying arrearages
over a period of time and to deaccelerate and reinstate the original mortgage
loan payment schedule, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court (provided no sale of
the property had yet occurred) prior to the filing of the debtor's petition
under the Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when the repayment plan becomes effective, while defaults
may be cured over a longer period of time under a Chapter 11 plan of
reorganization.
Generally, a repayment plan in a case under Chapter 13 may not modify the
claim of a mortgage lender if the borrower elects to retain the property, the
property is the borrower's principal residence and the property is the lender's
only collateral. Certain courts have allowed modifications when the mortgage
loan is secured both by the debtor's principal residence and by collateral that
is not "inextricably bound" to the real property, such as appliances,
machinery, or furniture. Certain courts have also allowed modifications when
the Mortgage Loan is fully unsecured at the time of bankruptcy.
The general protection for mortgages secured only by the debtor's
principal residence is not applicable in a case under Chapter 13 if the last
payment on the original payment schedule is due before the final date for
payment under the debtor's Chapter 13 plan (which date could be up to five
years after the debtor emerges from bankruptcy). Under several recently decided
cases, the terms of such a loan can be modified in the manner described above.
While these decisions are contrary to the holding in a prior case by a senior
appellate court, it is possible that the later decisions will become the
accepted interpretation in view of the language of the applicable statutory
provision. If this interpretation is adopted by a court considering the
treatment in a Chapter 13 repayment plan of a Mortgage Loan, it is possible
that the Mortgage Loan could be modified.
State statutes and general principles of equity may also provide a
mortgagor with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
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A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation being considered by the Senate would amend
the Bankruptcy Code (such amendment, the "TILA AMENDMENT") to authorize
bankruptcy court judges to disallow claims based on secured debt if the
creditor failed to comply with certain provisions of the federal Truth in
Lending Act. As most recently proposed, such provision would apply
retroactively to secured debt incurred by a debtor prior to the date of
effectiveness of such legislation, including the Mortgage Loans. The House bill
does not include a comparable provision as of the date hereof. If the TILA
Amendment were to become law, a violation of the Truth in Lending act with
respect to a Mortgage Loan could result in a total loss with respect to such
loan in a bankruptcy proceeding. Any such violation would be a breach of
representation and warranty of the Depositor, and the Depositor would be
obligated to repurchase such Mortgage Loan as described herein.
Various proposals to amend the Bankruptcy Code in ways that could
adversely affect the value of the Mortgage Loans in a trust have been
considered by Congress, and more such proposed legislation may be considered in
the future. No assurance can be given that any particular proposal will or will
not be enacted into law, or that any provision so enacted will not differ
materially from the proposals described above.
The Bankruptcy Code provides priority to certain tax liens over the lien
of the mortgage. In addition, substantive requirements are imposed upon
mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan
is prepaid.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under the deeds of trust receive notices in addition to
the statutorily-prescribed minimum requirements. For the most part,
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these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protections to the borrower.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate, among
other things: emissions of air pollutants; discharges of wastewater or storm
water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBS").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
("SUPERLIENS"). In the latter states, the security interest of the Trustee in a
property that is subject to such Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("CLEANUP COSTS") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be substantial.
CERCLA imposes strict, as well as joint and several liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation
and/or damages at those off-site locations. Many states also have laws that are
similar to CERCLA. Liability under CERCLA or under similar state law could
exceed the value of the property itself as well as the aggregate assets of the
property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Fund. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have "participated
in the management" of the operations of the borrower, even though the
environmental damage or threat was caused by a prior owner or current owner or
operator or other third party. Excluded from CERCLA's definition of "owner or
operator" is a person "who without participating in the management of . . .
[the] facility, holds indicia of ownership primarily to protect his security
interest" (the "secured-creditor exemption"). This exemption for holders of a
security interest such as a secured lender applies only to the extent that a
lender seeks to protect its security interest in the contaminated facility or
property. Thus, if a lender's activities begin to encroach on the actual
management of such facility or property, the lender faces potential liability
as an "owner or operator" under CERCLA. Similarly, when a lender forecloses and
takes title to a contaminated facility or property, the lender may incur
potential CERCLA liability in various circumstances, including among others,
when it holds the facility or property as an investment (including leasing the
facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
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The Resource Conservation and Recovery Act, as amended ("RCRA"), contains
a similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of the UST. In addition, if the lender takes title to or possession
of the UST or the real estate containing the UST, under certain circumstances
the secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of the
facility or participated in decisions relating to hazardous waste to be liable
under CERCLA; rather, liability could attach to a lender if its involvement
with the management of the facility were broad enough to support the inference
that the lender had the capacity to influence the borrower's treatment of
hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the
facility's financial management. A subsequent decision by the United States
Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp., apparently
disagreeing with, but not expressly contradicting, the Fleet Factors court,
held that a secured lender had no liability absent "some actual management of
the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts
to provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 28, 1996, Congress enacted, and on September 30, 1996 the
President signed into law the Asset Conservation Lender Liability and Deposit
Insurance Protection Act of 1996 (the "ASSET CONSERVATION ACT"). The Asset
Conservation Act was intended to clarify the scope of the secured creditor
exemption. This legislation more clearly defines the kinds of activities that
would constitute "participation in management" and that therefore would trigger
liability for secured parties under CERCLA. It also identified certain
activities that ordinarily would not trigger liability, provided, however, that
such activities did not otherwise rise to the level of "participation in
management." The Asset Conservation Act specifically reverses the Fleet Factors
"capacity to influence" standard. The Asset Conservation Act also provides
additional protection against liability in the event of foreclosure. However,
since the courts have not yet had the opportunity to interpret the new
statutory provisions, the scope of the additional protections offered by the
Asset Conservation Act is not fully defined. It also is important to note that
the Asset Conservation Act does not offer complete protection to lenders and
that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment-proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the Trust Fund and occasion a loss to the Trust Fund and to Securityholders in
certain circumstances. The new secured creditor amendments to CERCLA, also,
would not necessarily affect the potential for liability in actions by either a
state or a private party under other federal or state laws which may impose
liability on "owners or operators" but do not incorporate the secured-creditor
exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property prior to the origination of the mortgage loan
or prior to foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
Depositor nor any Servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of such Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such Mortgaged
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Property; the impact on Securityholders of any environmental condition or
presence of any substance on or near such Mortgaged Property; or the compliance
of any Mortgaged Property with any environmental laws. In addition, no agent,
person or entity otherwise affiliated with the Depositor is authorized or able
to make any such representation, warranty or assumption of liability relative
to any such Mortgaged Property.
DUE-ON-SALE CLAUSES
Unless the related prospectus supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that
the lender may accelerate the maturity of the loan if the mortgagor sells,
transfers or conveys the related Mortgaged Property. The enforceability of
due-on-sale clauses has been the subject of legislation or litigation in many
states and, in some cases, the enforceability of these clauses was limited or
denied. However, with respect to certain loans the Garn-St. Germain Depository
Institutions Act of 1982 (the "GARN-ST. GERMAIN ACT") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan associations
of federal savings banks are fully enforceable pursuant to regulations of the
United States Federal Home Loan Bank Board, as succeeded by the Office of
Thrift Supervision ("OTS"), which preempt state law restrictions on the
enforcement of such clauses. Similarly, "due-on-sale" clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St. Germain Act also sets forth nine specific instances in which
a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale"
clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a loan
pursuant to a due-on-sale clause. The inability to enforce a "due-on-sale"
clause may result in a mortgage that bears an interest rate below the current
market rate being assumed by a new home buyer rather than being paid off, which
may affect the average life of the Mortgage Loans and the number of Mortgage
Loans which may extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are
owner-occupied, it is anticipated that prepayment charges may not be imposed
with respect to many of the Mortgage Loans. The absence of such a restraint on
prepayment, particularly with respect to fixed rate Mortgage Loans having
higher Mortgage Rates, may increase the likelihood of refinancing or other
early retirement of such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any
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existing junior lender is harmed or the mortgagor is additionally burdened.
Third, if the mortgagor defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar proceedings by the
senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision that
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1,
1980 are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges prior to origination of
such mortgage loans, any such limitation under such state's usury law would not
apply to such mortgage loans.
In any state in which application of Title V has been expressly rejected
or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of such state action will be eligible
for inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given
effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only
for the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage
or deed of trust without any payment or prohibiting the lender from
foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St. Germain Act ("TITLE VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions; and all other non-federally chartered housing creditors,
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including state-chartered savings and loan associations, state-chartered
savings banks and mutual savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by adopting,
prior to October 15, 1985, a law or constitutional provision expressly
rejecting the applicability of such provisions. Certain states have taken such
action.
HOMEOWNERS PROTECTION ACT OF 1998
The Homeowners Protection Act of 1998 ("HOPA") provides for certain
disclosure and termination requirements for primary mortgage insurance ("PMI").
The termination provisions of HOPA apply only to mortgage loans relating to
single-family primary residences originated on or after July 29, 1999. Such
termination provisions govern when a mortgagor may cancel the requirement to
maintain PMI and when the requirement to maintain PMI is automatically
terminated. In general, voluntary termination is permitted and automatic
termination occurs when the principal balance of the mortgage loan is reduced
to 80% or 78%, respectively, of the original property value. The disclosure
requirements of HOPA vary depending on whether the mortgage loan was originated
before or after July 29, 1999. Such disclosure requirements include
notification of the circumstances whereby a mortgagor may cancel PMI, the date
when PMI automatically terminates and servicer contact information. In
addition, HOPA provides that no later than 30 days after cancellation or
termination of PMI, the servicer shall provide written notification that such
PMI is terminated and no further payments are due or payable. Any servicer,
mortgagee or mortgage insurer that violates provisions of HOPA is subject to
possible liability which includes, but is not limited to, actual damages,
statutory damages and reasonable attorney's fees.
TEXAS HOME EQUITY LOANS
Generally, any "cash-out" refinance or other non-purchase money
transaction (except for rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to the
provisions set forth in Section 50(a)(6) of Article XVI of the Constitution of
Texas (the "TEXAS HOME EQUITY LAWS"). The Texas Home Equity Laws provide for
certain disclosure requirements, caps on allowable fees, required loan closing
procedures and other restrictions. Failure, inadvertent or otherwise, to comply
with any requirement may render the Mortgage Loan unenforceable and/or the lien
on the Mortgaged Property invalid. Because mortgage loans which are subject to
the Texas Home Equity Laws can be foreclosed only pursuant to court order,
rather than non-judicial foreclosure as is available for other types of
mortgage loans in Texas, delays and increased losses may result in connection
with foreclosures of such loans. If a court were to find that any requirement
of the Texas Home Equity Laws was not complied with, the court could refuse to
allow foreclosure to proceed, declare the lien on the Mortgaged Property to be
invalid, and/or require the originating lender or the holder of the note to
forfeit some or all principal and interest of the related Mortgage Loan. Title
insurance generally available on such Mortgage Loans may exclude coverage for
some of the risks described in this paragraph.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 AND SIMILAR LAWS
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "RELIEF ACT"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans in a Trust Fund. Any
shortfall in interest collections resulting from the application of the Relief
Act could result in losses to the holders of the
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Certificates of the related Series. Further, the Relief Act imposes limitations
which would impair the ability of the Servicer to foreclose on an affected
Mortgage Loan during the borrower's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion. Certain states have enacted comparable legislation which may
interfere with or affect the ability of the Servicer to timely collect payments
of principal and interest on, or to foreclose on, Mortgage Loans of borrowers
in such states who are active or reserve members of the armed services.
FORFEITURES IN DRUG, RICO AND MONEY LAUNDERING VIOLATIONS
Federal law provides that property purchased or improved with assets
derived from criminal activity or otherwise tainted, or used in the commission
of certain offenses, can be seized and ordered forfeited to the United States
of America. The offenses which can trigger such a seizure and forfeiture
include, among others, violations of the Racketeer Influenced and Corrupt
Organizations Act, the Bank Secrecy Act, the anti-money laundering laws and
regulations, including the USA Patriot Act of 2001 and the regulations issued
thereunder, as well as the narcotic drug laws. In many instances, the United
States may seize the property even before a conviction occurs.
In the event of a forfeiture proceeding, a lender may be able to establish
its interest in the property by proving that (i) its mortgage was executed and
recorded before the commission of the illegal conduct from which the assets
used to purchase or improve the property were derived or before any other crime
upon which the forfeiture is based, or (ii) the lender, at the time of
execution of the mortgage, "did not know or was reasonably without cause to
believe that the property was subject to forfeiture." However, there can be no
assurance that such a defense will be successful.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in
their entirety by reference to the appropriate laws of the states in which
Contracts may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the applicable
Agreement, the Servicer will transfer physical possession of the Contracts to
the Trustee or its custodian or may retain possession of the Contracts as
custodian for the Trustee. In addition, the Servicer will make an appropriate
filing of a UCC-1 financing statement in the appropriate states to give notice
of the Trustee's ownership of the Contracts. The Contracts will be stamped or
marked otherwise to reflect their assignment from the Company to the Trustee
only if provided in the related prospectus supplement. Therefore, if, through
negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the Contracts without notice of such assignment, the
Trustee's interest in Contracts could be defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the
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certificate of title or by delivery of the required documents and payment of a
fee to the state motor vehicle authority, depending on state law. In some
nontitle states, perfection pursuant to the provisions of the UCC is required.
The Asset Seller may effect such notation or delivery of the required documents
and fees, and obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home securing a
manufactured housing conditional sales contract is registered. In the event the
Asset Seller fails, due to clerical error, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Asset
Seller may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them,
courts in many states have held that manufactured homes, under certain
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home
is located. These filings must be made in the real estate records office of the
county where the home is located. Substantially all of the Contracts contain
provisions prohibiting the borrower from permanently attaching the Manufactured
Home to its site. So long as the borrower does not violate this agreement, a
security interest in the Manufactured Home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to its site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest originally retained by the Asset Seller and
transferred to the Depositor. With respect to a Series of Securities and if so
described in the related prospectus supplement, the Servicer may be required to
perfect a security interest in the Manufactured Home under applicable real
estate laws. The Warranting Party will represent that as of the date of the
sale to the Depositor it has obtained a perfected first priority security
interest by proper notation or delivery of the required documents and fees with
respect to substantially all of the Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned to the Trustee on behalf of the Securityholders. The Depositor
or the Trustee will amend the certificates of title (or file UCC-3 statements)
to identify the Trustee as the new secured party, and will deliver the
certificates of title to the Trustee or note thereon the interest of the
Trustee only if specified in the related prospectus supplement. Accordingly,
the Asset Seller (or other originator of the Contracts) will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In some states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to Servicer's rights as
the secured party. However, in some states, in the absence of an amendment to
the certificate of title (or the filing of a UCC-3 statement), such assignment
of the security interest in the Manufactured Home may not be held effective or
such security interests may not be perfected and in the absence of such
notation or delivery to the Trustee, the assignment of the security interest in
the Manufactured Home may not be effective against creditors of the Asset
Seller (or such other originator of the Contracts) or a trustee in bankruptcy
of the Asset Seller (or such other originator).
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Asset
Seller (or other originator of the Contracts) on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
Securityholders against the rights of subsequent purchasers of a Manufactured
Home or subsequent lenders who take a security interest in the Manufactured
Home. If there are any Manufactured Homes as to which the security interest
assigned to the Trustee is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying the Trustee as the new secured party on the certificate of
title that, through fraud or negligence, the security interest of the Trustee
could be released.
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In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Servicer must surrender possession if it
holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien, the
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of
title. Accordingly, the Trustee would have the opportunity to re-perfect its
security interest in the Manufactured Home in the state of relocation. In
states which do not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In the ordinary
course of servicing the manufactured housing contracts, the Servicer takes
steps to effect such re-perfection upon receipt of notice of re-registration or
information from the obligor as to relocation. Similarly, when an obligor under
a manufactured housing contract sells a manufactured home, the Servicer must
surrender possession of the certificate of title or, if it is noted as
lienholder on the certificate of title, will receive notice as a result of its
lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. Under the applicable Agreement, the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
applicable Agreement that it has no knowledge of any such liens with respect to
any Manufactured Home securing payment on any Contract. However, such liens
could arise at any time during the term of a Contract. No notice will be given
to the Trustee or Securityholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Servicer on behalf of the Trustee, to the extent required by the
applicable Agreement, may take action to enforce the Trustee's security
interest with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such defaulted Contracts. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale
of a Manufactured Home, the Trustee would be entitled to be paid out of the
sale proceeds before such proceeds could be applied to the payment of the
claims of unsecured creditors or the holders of subsequently perfected security
interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the manufactured home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a
judgment.
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Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 AND SIMILAR LAWS
The terms of the Relief Act apply to an obligor on a Contract as described
for a mortgagor on a Mortgage Loan under "Certain Legal Aspects of Mortgage
Loans -- Soldiers' and Sailors' Civil Relief Act of 1940 and Similar Laws."
CONSUMER PROTECTION LAWS
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal
Trade Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act
and the Uniform Consumer Credit Code. In the case of some of these laws, the
failure to comply with their provisions may affect the enforceability of the
related Contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF DUE-ON-SALE CLAUSES
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such
sale or transfer that is not consented to. Generally, it is expected that the
Servicer will permit most transfers of Manufactured Homes and not accelerate
the maturity of the related Contracts. In certain cases, the transfer may be
made by a delinquent obligor in order to avoid a repossession proceeding with
respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the
"due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
APPLICABILITY OF USURY LAWS
Title V provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen
states adopted such a law prior to the April 1, 1983 deadline. In addition,
even where Title V was not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on loans covered by
Title V. The related Asset Seller will represent that all of the Contracts
comply with applicable usury law.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion is based on the advice of Cadwalader, Wickersham
& Taft and Orrick, Herrington & Sutcliffe LLP as to the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Securities offered hereunder. As to any Securities offered pursuant hereto,
Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe LLP is of the
opinion that the following discussion, as supplemented by the discussion under
the heading "Federal Income Tax Consequences," if any, in the Prospectus
Supplement accompanying this Prospectus with respect to those Securities, is
correct in all material respects. Except as specifically set forth elsewhere
herein, the opinion set forth in the preceding sentence is the only opinion
being rendered with respect to tax matters affecting the Securities offered
hereunder by Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe
LLP. This discussion is directed solely to Securityholders that hold the
Securities as capital assets within the meaning of Section 1221 of the Internal
Revenue Code of 1986, as amended (the "CODE") and does not purport to discuss
all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively. In
addition to the federal income tax consequences described herein, potential
investors should consider the state and local tax consequences, if any, of the
purchase, ownership and disposition of the Securities. See "State and Other Tax
Consequences." Securityholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Securities offered hereunder.
The following discussion addresses securities of four general types:
o securities ("REMIC SECURITIES") representing interests in a Trust Fund,
or a portion thereof, that the Trustee will elect to have treated as a
REMIC under Sections 860A through 860G (the "REMIC PROVISIONS") of the
Code,
o securities ("GRANTOR TRUST SECURITIES") representing interests in a Trust
Fund ("GRANTOR TRUST FUND") as to which no such election will be made,
o securities ("PARTNERSHIP SECURITIES") representing interests in a Trust
Fund ("PARTNERSHIP TRUST FUND") which is treated as a partnership for
federal income tax purposes, and
o securities ("DEBT SECURITIES") representing indebtedness of a Partnership
Trust Fund for federal income tax purposes.
The prospectus supplement for each Series of Securities will indicate which of
the foregoing treatments will apply to such Series and, if a REMIC election (or
elections) will be made for the related Trust Fund, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, (i) references to a "Securityholder" or a "holder" are to the
beneficial owner of a Security, (ii) references to "REMIC Pool" are to an
entity or portion thereof as to which a REMIC election will be made and (iii)
unless indicated otherwise in the applicable prospectus supplement, references
to "Mortgage Loans" include Contracts. Except as set forth in the applicable
prospectus supplement, no REMIC election will be made with respect to Unsecured
Home Improvement Loans. The discussion below assumes that no election will be
made to treat the Trust Fund, or any portion thereof, as a FASIT under Sections
860H through 860L of the Code. If a FASIT election is made for a particular
Series, the prospectus supplement for that Series will address the material
federal income tax consequences of such election. Securities issued with
respect to a Series for which a FASIT election has been made are referred to
herein as "FASIT Securities."
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of
the Code and in the Treasury regulations issued
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thereunder (the "OID REGULATIONS"), and in part upon the REMIC Provisions and
the Treasury regulations issued thereunder (the "REMIC REGULATIONS"). The OID
Regulations do not adequately address certain issues relevant to, and in some
instances provide that they are not applicable to, securities such as the
Securities.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain entities
issuing non-REMIC debt obligations secured by real estate mortgages ("TAXABLE
MORTGAGE POOLS"). Any entity other than a REMIC or a FASIT will be considered a
Taxable Mortgage Pool if:
o substantially all of the assets of the entity consist of debt obligations
and more than 50% of such obligations consist of "real estate mortgages,"
o such entity is the obligor under debt obligations with two or more
maturities, and
o under the terms of the debt obligations on which the entity is the
obligor, payments on such obligations bear a relationship to payments on
the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Depositor generally will structure offerings of non-REMIC Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
With respect to each Series of REMIC Securities, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Trust Fund (or each applicable portion thereof) will qualify as a REMIC and the
REMIC Securities offered with respect thereto will be considered to evidence
ownership of "regular interests" ("REGULAR SECURITIES") or "residual interests"
("RESIDUAL SECURITIES") in that REMIC within the meaning of the REMIC
Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Securities) and at all
times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a safe harbor pursuant
to which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de
minimis amount of nonqualified assets. A REMIC Pool also must provide
"reasonable arrangements" to prevent its residual interests from being held by
"disqualified organizations" or agents thereof and must furnish applicable tax
information to transferors or agents that violate this requirement. The Pooling
and Servicing Agreement with respect to each Series of REMIC Securities will
contain provisions meeting these requirements. See "-- Taxation of Owners of
Residual Securities -- Tax-Related Restrictions on Transfer of Residual
Securities -- Disqualified Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in Tiered REMICs. The REMIC Regulations
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specify that loans secured by timeshare interests, shares held by a tenant
stockholder in a cooperative housing corporation, and manufactured housing that
qualifies as a "single family residence" under Code section 25(e)(10) can be
qualified mortgages. A qualified mortgage includes a qualified replacement
mortgage, which is any property that would have been treated as a qualified
mortgage if it were transferred to the REMIC Pool on the Startup Day and that
is received either (i) in exchange for any qualified mortgage within a
three-month period thereafter or (ii) in exchange for a "defective obligation"
within a two-year period thereafter. A "defective obligation" includes:
o a mortgage in default or as to which default is reasonably foreseeable,
o a mortgage as to which a customary representation or warranty made at the
time of transfer to the REMIC Pool has been breached,
o a mortgage that was fraudulently procured by the mortgagor, and
o a mortgage that was not in fact principally secured by real property (but
only if such mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is "defective" as described in this clause that is not
sold or, if within two years of the Startup Day, exchanged, within 90
days of discovery, ceases to be a qualified mortgage after such 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally may not be held beyond the close
of the third calendar year beginning after the taxable year of acquisition
unless an extension is granted by the IRS.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more Classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting of a specified,
nonvarying portion of interest payments on qualified mortgages may be zero. A
residual interest is an interest in a REMIC Pool other than a regular interest
that is issued on the Startup Day and that is designated as a residual
interest. An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal with respect to such interest are subordinated to
payments on other regular interests or the residual interest in the REMIC Pool,
and are dependent on the absence of defaults or delinquencies on qualified
mortgages or permitted investments, lower than reasonably expected returns on
permitted investments, unanticipated expenses incurred by the REMIC Pool or
prepayment
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interest shortfalls. Accordingly, the Regular Securities of a Series will
constitute one or more Classes of regular interests, and the Residual
Securities with respect to that Series will constitute a single Class of
residual interests with respect to each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Securities may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief
in the event of an inadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC Pool
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
In general, the REMIC Securities will be treated as "real estate assets"
within the meaning of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code in the same proportion that the assets of
the REMIC Pool underlying such Securities would be so treated. Moreover, if 95%
or more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Mortgage Loans, it is possible
that the percentage of such assets constituting "loans . . . secured by an
interest in real property which is . . . residential real property" for
purposes of Code Section 7701(a)(19)(C)(v) may be required to be reduced by the
amount of the related funds paid thereon (the "BUYDOWN FUNDS"). Interest
(including original issue discount) on the Regular Securities and income
allocated to the Class of Residual Securities will be interest described in
Section 856(c)(3)(B) of the Code to the extent that such Securities are treated
as "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code.
In addition, the Regular Securities generally will be "qualified mortgages"
within the meaning of Section 860G(a)(3) of the Code if transferred to another
REMIC on its Startup Day in exchange for regular or residual interests therein.
Regular Securities held by a FASIT will qualify for treatment as "permitted
assets" within the meaning of Section 860L(c)(1)(G) of the Code. The
determination as to the percentage of the REMIC Pool's assets that constitute
assets described in the foregoing sections of the Code will be made with
respect to each calendar quarter based on the average adjusted basis of each
category of the assets held by the REMIC Pool during such calendar quarter. The
REMIC will report those determinations to Securityholders in the manner and at
the times required by applicable Treasury regulations. The Small Business Job
Protection Act of 1996 (the "SBJPA OF 1996") repealed the reserve method of bad
debts of domestic building and loan associations and mutual savings banks, and
thus has eliminated the asset category of "qualifying real property loans" in
former Code Section 593(d) for taxable years beginning after December 31, 1995.
The requirements in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves are suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure
held pending sale and amounts in reserve accounts would be considered to be
part of the Mortgage Loans, or whether such assets (to the extent not invested
in
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assets described in the foregoing sections) otherwise would receive the same
treatment as the Mortgage Loans for purposes of all of the foregoing sections.
The REMIC Regulations do provide, however, that payments on Mortgage Loans held
pending distribution are considered part of the Mortgage Loans for purposes of
Section 856(c)(4)(A) of the Code. Furthermore, foreclosure property generally
will qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For certain Series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("TIERED REMICS") for federal income tax purposes. Upon the issuance of any
such Series of REMIC Securities, Cadwalader, Wickersham & Taft or Orrick,
Herrington & Sutcliffe LLP will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the Tiered REMICs will each qualify as a REMIC and the
REMIC Securities issued by the Tiered REMICs will be considered to evidence
ownership of Regular Securities or Residual Securities in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Securities is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
GENERAL
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the "REGULAR SECURITYHOLDER"), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to
Regular Securities, regardless of the method of accounting otherwise used by
such Regular Securityholder.
ORIGINAL ISSUE DISCOUNT
Accrual Securities will be, and other Classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary
income for federal income tax purposes as it accrues, in accordance with a
constant yield method that takes into account the compounding of interest, in
advance of the receipt of the cash attributable to such income. The following
discussion is based in part on temporary and final Treasury regulations issued
on February 2, 1994, as amended on June 14, 1996, (the "OID REGULATIONS") under
Code Section 1271 through 1273 and 1275 and in part on the provisions of the
1986 Act. Regular Securityholders should be aware, however, that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Regular Securities. To the extent such issues are not
addressed in such regulations, the Depositor intends to apply the methodology
described in the Conference Committee Report to the 1986 Act. No assurance can
be provided that the IRS will not take a different position as to those matters
not currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the IRS to apply or depart from the OID
Regulations where necessary or appropriate to ensure a reasonable tax result in
light of the applicable statutory provisions. A tax result will not be
considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
therein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Securities.
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Each Regular Security (except to the extent described below with respect
to a Regular Security on which principal is distributed in a single installment
or by lots of specified principal amounts upon the request of a Securityholder
or by random lot (a "NON-PRO RATA SECURITY")) will be treated as a single
installment obligation for purposes of determining the original issue discount
includable in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the "stated redemption
price at maturity" of the Regular Security over its "issue price." The issue
price of a Class of Regular Securities offered pursuant to this prospectus
generally is the first price at which a substantial amount of such Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will
treat the issue price of a Class as to which there is no substantial sale as of
the issue date or that is retained by the Depositor as the fair market value of
the Class as of the issue date. The issue price of a Regular Security also
includes any amount paid by an initial Regular Securityholder for accrued
interest that relates to a period prior to the issue date of the Regular
Security, unless the Regular Securityholder elects on its federal income tax
return to exclude such amount from the issue price and to recover it on the
first Distribution Date. The stated redemption price at maturity of a Regular
Security always includes the original principal amount of the Regular Security,
but generally will not include distributions of interest if such distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below), provided that such interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Security. Because there is no penalty or default
remedy in the case of nonpayment of interest with respect to a Regular
Security, it is possible that no interest on any Class of Regular Securities
will be treated as qualified stated interest. However, except as provided in
the following three sentences or in the applicable prospectus supplement,
because the underlying Mortgage Loans provide for remedies in the event of
default, it is anticipated that the Trustee will treat interest with respect to
the Regular Securities as qualified stated interest. Distributions of interest
on an Accrual Security, or on other Regular Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest,
in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Likewise, it is anticipated that the Trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called "SUPER-PREMIUM" Class) as having no qualified stated
interest. Where the interval between the issue date and the first Distribution
Date on a Regular Security is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted average maturity of the Regular Security is computed as
the sum of the amounts determined by multiplying the number of full years
(i.e., rounding down partial years) from the issue date until each distribution
in reduction of stated redemption price at maturity is scheduled to be made by
a fraction, the numerator of which is the amount of each distribution included
in the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. The Conference Committee Report to the 1986 Act provides that the
schedule of such distributions should be determined in accordance with the
assumed rate of prepayment of the Mortgage Loans (the "PREPAYMENT ASSUMPTION")
and the anticipated reinvestment rate, if any, relating to the Regular
Securities. The Prepayment Assumption with respect to a Series of Regular
Securities will be set forth in the applicable prospectus supplement. Holders
generally must report de minimis original issue discount pro rata as principal
payments are received, and such income will be capital gain if the Regular
Security is held as a capital asset. Under the OID Regulations, however,
Regular Securityholders may elect to accrue all de minimis original issue
discount as well as market discount and market premium, under the constant
yield method. See "-- Election to Treat All Interest Under the Constant Yield
Method."
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A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for
each day on which it holds the Regular Security, including the date of purchase
but excluding the date of disposition. The Trustee will treat the monthly
period ending on the day before each Distribution Date as the accrual period.
With respect to each Regular Security, a calculation will be made of the
original issue discount that accrues during each successive full accrual period
(or shorter period from the date of original issue) that ends on the day before
the related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any,
of (i) the sum of (a) the present value of all of the remaining distributions
to be made on the Regular Security as of the end of that accrual period, and
(b) the distributions made on the Regular Security during the accrual period
that are included in the Regular Security's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Security at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Security at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period, and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder
generally will increase to take into account prepayments on the Regular
Securities as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on each
Non-Pro Rata Security in a full accrual period would be its allocable share of
the original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Security (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Security (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Security of such Class will
be adjusted by reducing the present value of the remaining payments on such
Class and the adjusted issue price of such Class to the extent attributable to
the portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the "pro
rata prepayment" rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to
this treatment.
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ACQUISITION PREMIUM
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily
portions of the original issue discount on the Regular Security reduced pro
rata by a fraction, the numerator of which is the excess of its purchase price
over such adjusted issue price and the denominator of which is the excess of
the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "-- Election to Treat All Interest Under the Constant Yield
Method."
VARIABLE RATE REGULAR SECURITIES
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds. A multiple of a
qualified floating rate is considered a qualified floating rate only if the
rate is equal to either (a) the product of a qualified floating rate and a
fixed multiple that is greater than 0.65 but not more than 1.35 or (b) the
product of a qualified floating rate and a fixed multiple that is greater that
0.65 but not more than 1.35, increased or decreased by a fixed rate. Such rate
may also be subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Securities may be issued under this prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different rates
at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to bear
"contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Securities. However, if final regulations
dealing with contingent interest with respect to Regular Securities apply the
same principles as the OID Regulations, such regulations may lead to different
timing of income inclusion that would be the case under the OID Regulations.
Furthermore, application of such principles could lead to the characterization
of gain on the sale of contingent interest Regular Securities as ordinary
income. Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Security that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing interest at a
rate that qualifies as a variable rate under the OID Regulations that is tied
to current values of a variable rate (or the highest, lowest or average of two
or more variable rates, including a rate based on the average cost of funds of
one or more financial institutions), or a positive or negative multiple of such
a rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable prospectus supplement, it is anticipated
that the Trustee will treat Regular Securities that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
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The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under "Original Issue Discount," with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includable in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes
in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Seller intends to treat Regular Securities
bearing an interest rate that is a weighted average of the net interest rates
on Mortgage Loans as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Securities for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed-rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable-rate Mortgage Loans. In the case of adjustable-rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Securities.
MARKET DISCOUNT
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (i) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified
stated interest payments due on a Regular Security, or (ii) in the case of a
Regular Security having original issue discount, is exceeded by the adjusted
issue price of such Regular Security at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Security as distributions includable in
the stated redemption price at maturity thereof are received, in an amount not
exceeding any such distribution. Such market discount would accrue in a manner
to be provided in Treasury regulations and should take into account the
Prepayment Assumption. The Conference Committee Report to the 1986 Act provides
that until such regulations are issued, such market discount would accrue
either (i) on the basis of a constant interest rate, or (ii) in the ratio of
stated interest allocable to the relevant period to the sum of the interest for
such period plus the remaining interest as of the end of such period, or in the
case of a Regular Security issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally will
be required to treat a portion of any gain on a sale or exchange of the Regular
Security as ordinary income to the extent of the market discount accrued to the
date of disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Security over the interest distributable thereon. The deferred portion
of such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Security for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Security is disposed of. As an alternative to the inclusion of market
discount in income on
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the foregoing basis, the Regular Securityholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Securityholder in that taxable year or thereafter, in
which case the interest deferral rule will not apply. See "-- Election to Treat
All Interest Under the Constant Yield Method" below regarding an alternative
manner in which such election may be deemed to be made. A person who purchases
a Regular Security at a price lower than the remaining amounts includable in
the stated redemption price at maturity of the security, but higher than its
adjusted issue price, does not acquire the Regular Security with market
discount, but will be required to report original issue discount, appropriately
adjusted to reflect the excess of the price paid over the adjusted issue price.
Market discount with respect to a Regular Security will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Security (or, in the case of a
Regular Security having original issue discount, the adjusted issue price of
such Regular Security) multiplied by the weighted average maturity of the
Regular Security (determined as described above in the third paragraph under
"-- Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "-- Original Issue Discount" above.
Under provisions of the OID Regulations relating to contingent payment
obligations, a secondary purchaser of a Regular Security that has "contingent
interest" at a discount generally would continue to accrue interest and
determine adjustments on the Regular Security based on the original projected
payment schedule devised by the issuer of the Security. The holder of such a
Regular Security would be required, however, to allocate the difference between
the adjusted issue price of the Regular Security and its basis in the Regular
Security as positive adjustments to the accruals or projected payments on the
Regular Security over the remaining term of the Regular Security in a manner
that is reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet
been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a given Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities.
Investors should also consult Revenue Procedure 92-67 concerning the elections
to include market discount in income currently and to accrue market discount on
the basis of the constant yield method.
AMORTIZABLE PREMIUM
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder may elect under Code Section 171 to amortize such premium under
a constant yield method that reflects compounding based on the interval between
payments on the Regular Security. Such election will apply to all taxable debt
obligations (including REMIC regular interests) acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the IRS. Final Treasury regulations have been
issued with respect to amortizable bond premiums which do not by their terms
apply to prepayable debt instruments such as the Regular Securities. However,
the Conference Committee Report to the 1986 Act indicates a Congressional
intent that the same rules that apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Securities, although
it is unclear whether the alternatives to the constant interest method
described above under "-- Market Discount" are available. Amortizable bond
premium generally will be treated as an offset to interest income on a Regular
Security, rather than as a separate deduction. See "-- Election to Treat All
Interest Under the Constant Yield Method" below regarding an alternative manner
in which the Code Section 171 election may be deemed to be made.
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Amortizable premium on a Regular Security that is subject to redemption at
the option of the issuer generally must be amortized as if the optional
redemption price and date were the Security's principal amount and maturity
date if doing so would result in a smaller amount of premium amortization
during the period ending with the optional redemption date. Thus, a holder of a
Regular Security would not be able to amortize any premium on a Regular
Security that is subject to optional redemption at a price equal to or greater
than the Securityholder's acquisition price unless and until the redemption
option expires. A Regular Security subject to redemption at the option of the
issuer described in the preceding sentence will be treated as having matured on
the redemption date for the redemption price and then as having been reissued
on that date for that price. Any premium remaining on the Regular Security at
the time of the deemed reissuance will be amortized on the basis of (i) the
original principal amount and maturity date or (ii) the price and date of any
succeeding optional redemption, under the principles described above.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were
issued on the holder's acquisition date in the amount of the holder's adjusted
basis immediately after acquisition. It is unclear whether, for this purpose,
the initial Prepayment Assumption would continue to apply or if a new
prepayment assumption as of the date of the holder's acquisition would apply. A
holder generally may make such an election on an instrument by instrument basis
or for a Class or group of debt instruments. However, if the holder makes such
an election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS. Investors should consult their own tax advisors regarding
the advisability of making such an election.
TREATMENT OF LOSSES
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect
to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be established
that such losses are uncollectable. Accordingly, the holder of a Regular
Security, particularly a Subordinate Security, may have income, or may incur a
diminution in cash flow as a result of a default or delinquency, but may not be
able to take a deduction (subject to the discussion below) for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectable, the IRS may take
the position that original issue discount must continue to be accrued in spite
of its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. Under Code Section 166, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss
such loss with respect to principal sustained during the taxable year on
account of any such Regular Securities becoming wholly or partially worthless,
and that, in general, Regular Securityholders that are not corporations and do
not hold the Regular Securities in connection with a trade or business should
be allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Securities becoming
wholly worthless. Although the matter is not free from doubt, such
non-corporate Regular Securityholders should be
99
allowed a bad debt deduction at such time as the principal balance of such
Regular Securities is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The IRS, however, could take the position that non-corporate
holders will be allowed a bad debt deduction to reflect such losses only after
all the Mortgage Loans remaining in the Trust Fund have been liquidated or the
applicable Class of Regular Securities has been otherwise retired. The IRS
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer such deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount.
This may have the effect of creating "negative" original issue discount which
would be deductible only against future positive original issue discount or
otherwise upon termination of the Class. Regular Securityholders are urged to
consult their own tax advisors regarding the appropriate timing, amount and
character of any loss sustained with respect to such Regular Securities. While
losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
IRS may take the position that losses attributable to accrued original issue
discount may only be deducted as capital losses in the case of non-corporate
holders who do not hold the Regular Securities in connection with a trade or
business. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
SALE OR EXCHANGE OF REGULAR SECURITIES
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular
Security. The adjusted basis of a Regular Security generally will equal the
original cost of the Regular Security to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Security and reduced by amounts included in
the stated redemption price at maturity of the Regular Security that were
previously received by the seller, by any amortized premium, and by any
recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). Such gain will be
treated as ordinary income (i) if a Regular Security is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as part of such transaction, (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includable in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable Federal rate as of the date of purchase,
over (b) the amount of income actually includable in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Long-term capital gains of certain noncorporate taxpayers
generally are subject to a lower maximum tax rate than ordinary income or
short-term capital gains of such taxpayers for property held for more than one
year. Currently, the maximum tax rate for corporations is the same with respect
to both ordinary income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
TAXATION OF REMIC INCOME
Generally, the "daily portions" of REMIC taxable income or net loss will
be includable as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities
100
("RESIDUAL HOLDERS"), and will not be taxed separately to the REMIC Pool. The
daily portions of REMIC taxable income or net loss of a Residual Holder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Holders in proportion to their respective
holdings of Residual Securities in the REMIC Pool on such day. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium
on the Mortgage Loans, plus income from amortization of issue premium, if any,
on the Regular Securities, plus income on reinvestment of cash flows and
reserve assets, plus any cancellation of indebtedness income upon allocation of
realized losses to the Regular Securities. The REMIC Pool's deductions include
interest and original issue discount expense on the Regular Securities,
servicing fees on the Mortgage Loans, other administrative expenses of the
REMIC Pool and realized losses on the Mortgage Loans. The requirement that
Residual Holders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Securities of any Class of the
related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing
of recognition of interest, original issue discount or market discount income
or amortization of premium with respect to the Mortgage Loans, on the one hand,
and the timing of deductions for interest (including original issue discount)
or income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is
prepaid, the prepayment may be used in whole or in part to make distributions
in reduction of principal on the Regular Securities, and (ii) the discount on
the Mortgage Loans which is includable in income may exceed the deduction
allowed upon such distributions on those Regular Securities on account of any
unaccrued original issue discount relating to those Regular Securities. When
there is more than one Class of Regular Securities that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Securities when
distributions in reduction of principal are being made in respect of earlier
Classes of Regular Securities to the extent that such Classes are not issued
with substantial discount or are issued at a premium. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later maturing Classes of
Regular Securities are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a Series of Regular Securities, may increase over time as distributions in
reduction of principal are made on the lower yielding Classes of Regular
Securities, whereas, to the extent the REMIC Pool consists of fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of "excess inclusions" below under "-- Limitations on
Offset or Exemption of REMIC Income." The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Securities, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return.
A portion of the income of a Residual Securityholder may be treated
unfavorably in three contexts:
o it may not be offset by current or net operating loss deductions;
o it will be considered unrelated business taxable income to tax-exempt
entities; and
101
o it is ineligible for any statutory or treaty reduction in the 30%
withholding tax otherwise available to a foreign Residual Securityholder.
See "-- Limitations on Offset or Exemption of REMIC Income" below. In addition,
a Residual Holder's taxable income during certain periods may exceed the income
reflected by such Residual Holders for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security
is the amount paid for qsuch Residual Security. Such adjusted basis will be
increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Holder and will be decreased (but not below zero), first, by a cash
distribution from the REMIC Pool and, second, by the amount of loss of the
REMIC Pool reportable by the Residual Holder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Holder as to whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Although the law is unclear in certain respects, such recovery of basis
by the REMIC Pool will have the effect of amortization of the issue price of
the Residual Securities over their life. However, in view of the possible
acceleration of the income of Residual Holders described above under "--
Taxation of REMIC Income," the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the IRS may provide future guidance on the proper tax treatment of
payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Holders should consult their
own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "-- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Loans to the REMIC Pool and "-- Sale or Exchange of a Residual
Security" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
102
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "-- Taxation of Owners of Regular
Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities," without regard to the de minimis rule described therein, and "--
Taxation of Owners of Regular Securities -- Amortizable Premium."
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market discount
income generally should accrue in the manner described above under "-- Taxation
of Owners of Regular Securities -- Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "-- Taxation of Owners of Regular Securities --
Amortizable Premium," a person that holds a Mortgage Loan as a capital asset
under Code Section 1221 may elect under Code Section 171 to amortize premium on
Mortgage Loans originated after September 27, 1985 under the constant yield
method. Amortizable bond premium will be treated as an offset to interest
income on the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors on the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the IRS may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion (or all) of the REMIC taxable income includable in determining
the federal income tax liability of a Residual Holder will be subject to
special treatment. That portion, referred to as the "excess inclusion," is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Security over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Security (if it were a debt instrument) on the Startup Day under Code
Section 1274(d), multiplied by (ii) the adjusted issue price of such Residual
Security at the beginning of such quarterly period. For this purpose, the
adjusted issue price of a Residual Security at the beginning of a quarter is
the issue price of the Residual Security, plus the amount of such daily
accruals of REMIC income described in this paragraph for all prior quarters,
decreased by any distributions made with respect to such Residual Security
prior to the beginning of such quarterly period. Accordingly, the portion of
the REMIC Pool's taxable income that will be treated as excess inclusions will
be a larger portion of such income as the adjusted issue price of the Residual
Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax
on unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will
103
be treated as unrelated business taxable income of such Residual Holder for
purposes of Code Section 511. In addition, REMIC taxable income is subject to
30% withholding tax with respect to certain persons who are not U.S. Persons
(as defined below under "-- Tax-Related Restrictions on Transfer of Residual
Securities -- Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of withholding
tax (by treaty or otherwise). See "-- Taxation of Certain Foreign Investors --
Residual Securities" below. Finally, if a real estate investment trust or a
regulated investment company owns a Residual Security, a portion (allocated
under Treasury regulations yet to be issued) of dividends paid by the real
estate investment trust or regulated investment company could not be offset by
net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
("THRIFT INSTITUTIONS") to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities
that have "significant value" within the meaning of the REMIC Regulations,
effective for taxable years beginning after December 31, 1995, except with
respect to Residual Securities continuously held by a thrift institution since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to any
excess inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply
only to taxable years beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal
rate under Code Section 1274(d) as of the date of the transfer for a term
ending with the last calendar quarter in which excess inclusions are expected
to accrue. Such rate is applied to the anticipated excess inclusions from the
end of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Security, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Security would in no event be liable for such tax with
respect to a transfer if the transferee furnished to the transferor an
affidavit stating that the transferee is not a Disqualified Organization and,
as of the time of the transfer, the transferor does not have actual knowledge
that such affidavit is false. The tax also may be waived by the IRS if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income of
the
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Pass-Through Entity for the taxable year. The Pass-Through Entity would not be
liable for such tax if it has received an affidavit from such record holder
that it is not a Disqualified Organization or stating such holder's taxpayer
identification number and, during the period such person is the record holder
of the Residual Security, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "DISQUALIFIED ORGANIZATION" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
in not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (II) "PASS-THROUGH
ENTITY" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an "ELECTING LARGE PARTNERSHIP" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor
and the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee
or middleman thereof) and (ii) the transferor provides a statement in writing
to the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted
or purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Each Residual
Security with respect to a Series will bear a legend referring to such
restrictions on transfer, and each Residual Holder will be deemed to have
agreed, as a condition of ownership thereof, to any amendments to the related
Pooling and Servicing Agreement required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions. Information necessary to
compute an applicable excise tax must be furnished to the IRS and to the
requesting party within 60 days of the request, and the Depositor or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "-- Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in REMIC (including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless at the time of the transfer, (i) the
present value of the
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expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the transfer
occurs, and (ii) the transferor reasonably expects that the transferee will
receive distributions from the REMIC at or after the time at which taxes accrue
on the anticipated excess inclusions in an amount sufficient to satisfy the
accrued taxes on each excess inclusion. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "-- Disqualified Organizations." The REMIC Regulations explain that a
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have know that
the transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. Under the REMIC Regulations, as amended on
July 19, 2002, a safe harbor is provided if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial condition
of the transferee and found that the transferee historically had paid its debts
as they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they come due in the future,
(ii) the transferee represents to the transferor that it understands that, as
the holder of the non-economic residual interest, the transferee may incur
liabilities in excess of any cash flows generated by the interest and that the
transferee intents to pay taxes associated with holding the residual interest
as they become due, (iii) the transferee represents to the transferor that it
will not cause income from the Residual Security to be attributable to a
foreign permanent establishment or fixed base, within the meaning of an
applicable income tax treaty, and the Residual Security is, in fact, not
transferred to such a permanent establishment or fixed base of the transferee
or any other person and (iv) one of the two following test must be satisfied:
Either
(a) the present value of the anticipated tax liabilities associated with
holding the noneconomic residual interest not exceed the sum of:
(1) the present value of any consideration given to the transferee to
acquire the interest;
(2) the present value of the expected future distributions on the
interest; and
(3) the present value of the anticipated tax savings associated with
holding the interest as the REMIC generates losses.
For purposes of these computations, the transferee is assumed to pay tax at the
highest corporate rate of tax specified in the Code or, in certain
circumstances, the alternative minimum tax rate. Further, present values
generally are computed using a discount rate equal to the short-term Federal
rate set forth in Section 1247(d) of the Code for the month of the transfer and
the compounding period used by the transferee; or
(b) (1) the transferee must be a domestic "C" corporation (other than a
corporation exempt from taxation or a regulated investment company or real
estate investment trust) that meets certain asset test; (2) the transferee
must agree in writing that any subsequent transfer of the residual interest
would be to an eligible "C" corporation and would meet the requirements for
a safe harbor transfer; and (3) the facts and circumstances known to the
transferor on or before the date of the transfer must not reasonably
indicate that the taxes associated with ownership of the residual interest
will not be paid by the transferee.
The Pooling and Servicing Agreement with respect to each Series of
Certificates will require the transferee of a Residual Security to certify to
the matters in requirements (i)-(iv) above as part of the affidavit described
above under the heading "Disqualified Organizations." Unless otherwise
indicated in the applicable Prospectus Supplement, the Pooling and Servicing
Agreement will not require that transfers of the Residual Securities meet the
requirement (iv) above, and thus meet the safe harbor. Persons considering the
purchase of the Residual Securities should consult their advisors regarding the
advisability of meeting the safe harbor in any transfer of the Residual
Securities.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes.
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This rule appears intended to apply to a transferee who is not a "U.S. Person"
(as defined below), unless such transferee's income is effectively connected
with the conduct of a trade or business within the United States. A Residual
Security is deemed to have tax avoidance potential unless, at the time of the
transfer, (i) the future value of expected distributions equals at least 30% of
the anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions accrue
and prior to the end of the next succeeding taxable year for the accumulated
withholding tax liability to be paid. If the non-U.S. Person transfers the
Residual Security back to a U.S. Person, the transfer will be disregarded and
the foreign transferor will continue to be treated as the owner unless
arrangements are made so that the transfer does not have the effect of allowing
the transferor to avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
PERSON" means a citizens or resident of the United States, a corporation or
partnership (unless, in the case of a partnership, Treasury regulations are
adopted that provide otherwise) created or organized in or under the laws of
the United States, any state thereof or the District of Columbia, including an
entity treated as a corporation or partnership for federal income tax purposes,
an estate that is subject to U.S. federal income tax regardless of the source
of its income, or a trust if a court within the United States is able to
exercise primary supervision over the administration of such trust and one or
more such U.S. Persons have the authority to control all substantial decisions
of such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
SALE OR EXCHANGE OF A RESIDUAL SECURITY
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "-- Taxation of Owners of Residual
Securities -- Basis and Losses") of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it from the REMIC Pool exceeds such
adjusted basis on that Distribution Date. Such income will be treated as gain
from the sale or exchange of the Residual Holder's Residual Security, in which
case, if the Residual Holder has an adjusted basis in its Residual Security
remaining when its interest in the REMIC Pool terminates, and if it holds such
Residual Security as a capital asset under Code Section 1221, then it will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would
have accrued on the Residual Holder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate in effect at the
time the taxpayer entered into the transaction minus any amount previously
treated as ordinary income with respect to any prior disposition of property
that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the
sale or disposition of the Residual Security and ending six months after such
sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
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MARK TO MARKET REGULATIONS
On December 24, 1996, the IRS issued final regulations (the "MARK TO
MARKET REGULATIONS") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark to market requirement, a Residual Security is not treated as a security
and thus may not be marked to market. The Mark to Market Regulations apply to
all Residual Securities acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transaction by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includable
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
o the disposition of a qualified mortgages other than for (a) substitution
within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any
qualified mortgage within three months of the Startup Day, (b)
foreclosure, default, or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool, or (d) a qualified (complete)
liquidation,
o the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold,
o the receipt of compensation for services, or
o the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation.
Notwithstanding the first and fourth bullet points above, it is not a
prohibited transaction to sell a qualified mortgage or cash flow investment
held by a REMIC Pool to prevent a default on Regular Securities as a result of
a default on qualified mortgages or to facilitate a clean-up call (generally,
an optional termination to save administrative costs when no more than a small
percentage of the Securities is outstanding). The REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a mortgagor
pursuant to the terms of a convertible adjustable rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
o during the three months following the Startup Day,
o made to a qualified reserve fund by a Residual Holder,
o in the nature of a guarantee,
o made to facilitate a qualified liquidation or clean-up call, and
o as otherwise permitted in Treasury regulations yet to be issued.
108
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the close of the third calendar
year beginning after the year in which the REMIC Pool acquires such property,
with a possible extension. Net income from foreclosure property generally means
gain from the sale of a foreclosure property that is inventory property and
gross income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust. It is not anticipated
that the REMIC Pool will have any taxable net income from foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the IRS of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit in a unified administrative
proceeding. The Master Servicer will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool as agent of the Residual Holders holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person. The tax matters person generally has responsibility for
overseeing and providing notice to the other Residual Holders of certain
administrative and judicial proceedings regarding the REMIC Pool's tax affairs,
although other holders of the Residual Securities of the same Series would be
able to participate in such proceedings in appropriate circumstances.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser or (i) 3% of the
excess, if any, of adjusted gross income over $137,300 for 2002 ($68,650 in the
case of a married individual filing a separate return) (subject to annual
adjustments for inflation each year thereafter), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses
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relating to the REMIC Pool, or any similar expenses allocated to the REMIC Pool
with respect to a regular interest it holds in another REMIC. Such investors
who hold REMIC Securities either directly or indirectly through certain
pass-through entities may have their pro rata share of such expenses allocated
to them as additional gross income, but may be subject to such limitation on
deductions. In addition, such expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury regulations
provide that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Securities in
the case of a REMIC Pool that would not qualify as a fixed investment trust in
the absence of a REMIC election. With respect to a REMIC Pool that would be
classified as an investment trust in the absence of a REMIC election or that is
substantially similar to an investment trust, any holder of a Regular Security
that is an individual, trust, estate, or pass-through entity also will be
allocated its pro rata share of such expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. Unless indicated otherwise in the
applicable prospectus supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined
based on the ratio that a REMIC Securityholder's income, determined on a daily
basis, bears to the income of all holders of Regular Securities and Residual
Securities with respect to a REMIC Pool. As a result, individuals, estates or
trusts holding REMIC Securities (either directly or indirectly through a
grantor trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing temporary Treasury regulations) may have
taxable income in excess of the interest income at the pass-through rate on
Regular Securities that are issued in a single Class or otherwise consistently
with fixed investment trust status or in excess of cash distributions for the
related period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR SECURITIES
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (i) such interest is not effectively connected
with the conduct of a trade or business in the United States of the
Securityholder, (ii) such Non-U.S. Person is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (iii) such Non-U.S.
Person provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "NON-U.S. PERSON" means any person who is not a U.S. Person.
The IRS has recently issued final regulations (the "NEW REGULATIONS")
which would provide alternative methods of satisfying the beneficial ownership
certification requirement described above effective January 1, 2001. The New
Regulations provide for a new series of withholding certificates that must be
used for all payments after December 31, 2000. The New Regulations require, in
the case of Regular Securities held by a foreign partnership, that (x) the
certification described above be provided by the partners rather than by the
foreign partnership and (y) the partnership provide certain information,
including a United States taxpayer identification number in certain
circumstances. A look-through rule applies in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
110
RESIDUAL SECURITIES
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated
as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "-- Regular Securities" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable
income that constitutes an "excess inclusion." See "-- Taxation of Owners of
Residual Securities -- Limitations on Offset or Exemption of REMIC Income." If
the amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "--
Taxation of Owners of Residual Securities -- Tax-Related Restrictions on
Transfer of Residual Securities -- Foreign Investors" above concerning the
disregard of certain transfers having "tax avoidance potential." Investors who
are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 30% (29% in 2004-2005, and
28% beginning in 2006) on "reportable payments" (including interest
distributions, original issue discount, and, under certain circumstances,
principal distributions) unless the Regular Holder complies with certain
reporting and/or certification procedures, including the provision of its
taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an
exempt recipient under applicable provisions of the Code. Any amounts to be
withheld from distribution on the Regular Securities would be refunded by the
IRS or allowed as a credit against the Regular Holder's federal income tax
liability. The New Regulations change certain of the rules relating to certain
presumptions relating to information reporting and backup withholding. Non-U.S.
Persons are urged to contact their own tax advisors regarding the application
to them of backup withholding and information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the IRS and to individuals, estates, non-exempt and non-charitable trusts, and
partnerships who are either holders of record of Regular Securities or
beneficial owners who own Regular Securities through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Regular Securities (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Regular Securities. Holders through
nominees must request such information from the nominee.
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The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Holder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC Pool is in existence). Treasury regulations
require that, in addition to the foregoing requirements, information must be
furnished quarterly to Residual Holders, furnished annually, if applicable, to
holders of Regular Securities, and filed annually with the IRS concerning Code
Section 67 expenses (see "-- Taxes That May Be Imposed on the REMIC Pool --
Limitations on Deduction of Certain Expenses" above) allocable to such holders.
Furthermore, under such regulations, information must be furnished quarterly to
Residual Holders, furnished annually to holders of Regular Securities, and
filed annually with the IRS concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under
"Characterization of Investments in REMIC Securities."
Residual Holders should be aware that their responsibilities as holders of
the residual interest in a REMIC Pool, including the duty to account for their
shares of the REMIC Pool's income or loss on their returns, continue for the
life of the REMIC Pool, even after the principal and interest on their Residual
Securities have been paid in full.
Treasury regulations provide that a Residual Holder is not required to
treat items on its return consistently with their treatment on the REMIC Pool's
return if the Holder owns 100% of the Residual Securities for the entire
calendar year. Otherwise, each Residual Holder is required to treat items on
its returns consistently with their treatment on the REMIC Pool's return,
unless the Holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information received
from the REMIC Pool. The IRS may assess a deficiency resulting from a failure
to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level. A REMIC Pool typically will
not register as a tax shelter pursuant to Code Section 6111 because it
generally will not have a net loss for any of the first five taxable years of
its existence. Any person that holds a Residual Security as a nominee for
another person may be required to furnish the related REMIC Pool, in a manner
to be provided in Treasury regulations, with the name and address of such
person and other specified information.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each Series of Grantor Trust Securities, assuming
compliance with all provisions of the applicable Agreement, the related Grantor
Trust Fund will be classified as a grantor trust under subpart E, part I of
subchapter J of the Code and not as a partnership, an association taxable as a
corporation, or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Accordingly, each holder of a Grantor Trust Security generally will be
treated as the beneficial owner of an undivided interest in the Mortgage Loans
included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest or "excess" servicing with respect to
the Mortgage Loans underlying the Securities of a Series, and where such
Securities are not designated as "Stripped Securities," the holder of each such
Security in such Series (referred to herein as "STANDARD SECURITIES") will be
treated as the owner of a pro rata undivided interest in the ordinary income
and corpus portions of the Grantor Trust Fund represented by its Standard
Security and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Loans, subject to the discussion below under
"-- Recharacterization of Servicing Fees." Accordingly, the holder of a
Standard Security of a particular Series will be required to report on its
federal income tax return its
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pro rata share of the entire income from the Mortgage Loans represented by its
Standard Security, including interest at the coupon rate on such Mortgage
Loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the Servicer, in accordance with such
Securityholder's method of accounting. A Securityholder generally will be able
to deduct its share of the Servicing Fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered to
that Grantor Trust Fund. However, investors who are individuals, estates or
trusts who own Securities, either directly or indirectly through certain
pass-through entities, will be subject to limitations with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the Servicing Fee and all such administrative and other
expenses of the Grantor Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $137,300 in 2002
($68,650 in the case of a married individual filing a separate return) (in each
case, as adjusted annually for each year thereafter)(in each case, adjusted
annually for post-1991 inflation), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result, such investors
holding Standard Securities, directly or indirectly through a pass-through
entity, may have aggregate taxable income in excess of the aggregate amount of
cash received on such Standard Securities with respect to interest at the
pass-through rate or as discount income on such Standard Securities. In
addition, such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Retained
Interest with respect to the Mortgage Loans underlying a Series of Securities
or where the servicing fees are in excess of reasonable servicing compensation,
the transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "-- Stripped
Securities" and "-- Recharacterization of Servicing Fees," respectively.
Holders of Standard Securities, particularly any Class of a Series which
is a Subordinate Security, may incur losses of interest or principal with
respect to the Mortgage Loans. Such losses would be deductible generally only
as described above under "-- REMICs -- Taxation of Owners of Regular Securities
- -- Treatment of Losses," except that Securityholders on the cash method of
accounting would not be required to report qualified stated interest as income
until actual receipt.
TAX STATUS
With respect to a Series, Cadwalader, Wickersham & Taft or Orrick,
Herrington & Sutcliffe LLP has advised the Depositor that, except with respect
to a Trust Fund consisting of Unsecured Home Improvement Loans:
o A Standard Security owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is .
. . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Security is of the type described in
such section of the Code.
o A Standard Security owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such
assets will be considered "interest on obligations secured by mortgages
on real property" to such extent within the meaning of Code Section
856(c)(3)(B).
o A Standard Security owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Grantor Trust Fund consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
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An issue arises as to whether Buydown Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the first two bullet
pointed paragraphs above or whether the amount qualifying for such treatment
must be reduced by the amount of the Buydown Funds. There is indirect authority
supporting treatment of an investment in a Buydown Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under "-- REMICs --
Taxation of Owners of Residual Securities -- Premium." The rules allowing for
the amortization of premium are available with respect to Mortgage Loans
originated after September 27, 1985.
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
generally are applicable to mortgages originated after March 2, 1984. Under the
OID Regulations, original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible
by the borrower under applicable Code provisions or, under certain
circumstances, by the presence of "teaser" rates on the Mortgage Loans. See "--
Stripped Securities" below regarding original issue discount on Stripped
Securities.
Original issue discount generally must be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable prospectus supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includable in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includable by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "-- REMICs -- Taxation of Owners of Regular Securities -- Market
Discount," except that the ratable accrual methods described therein will not
apply. Rather, the holder will accrue market discount pro rata over the life of
the Mortgage Loans, unless the constant yield method is elected. Unless
indicated otherwise in the applicable prospectus supplement, no prepayment
assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Securityholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
114
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of Standard
Securities, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. IRS guidance
indicates that a servicing fee in excess of reasonable compensation ("EXCESS
SERVICING") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the IRS's approach is upheld, a Servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds."
Subject to the de minimis rule discussed below under "-- Stripped Securities,"
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Securities, and the original issue discount rules of the Code would apply to
the holder thereof. While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Servicer, or as including
such portion as a second Class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple Classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple Classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "-- Stripped
Securities" below for a further description of the federal income tax treatment
of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF STANDARD SECURITIES
Upon sale or exchange of a Standard Securities, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Security. In general, the aggregate adjusted basis
will equal the Securityholder's cost for the Standard Security, exclusive of
accrued interest, increased by the amount of any income previously reported
with respect to the Standard Security and decreased by the amount of any losses
previously reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss generally would be capital gain or loss
if the Standard Security was held as a capital asset. However, gain on the sale
of a Standard Security will be treated as ordinary income (i) if a Standard
Security is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
Securityholder's net investment in the conversion transaction at 120% of the
appropriate applicable Federal rate in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income
with respect to any prior disposition of property that was held as part of such
transaction or (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates. Long-term capital
gains of certain noncorporate taxpayers generally are subject to a lower
maximum tax rate than ordinary income or short-term capital gains of such
taxpayers for property held for more than one year. The maximum tax rate for
corporations currently is the same with respect to both ordinary income and
capital gains.
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STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as "STRIPPED
SECURITIES." The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest
in a portion of the payments on the Mortgage Loans, (ii) the Depositor or any
of its affiliates is treated as having an ownership interest in the Mortgage
Loans to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"-- Standard Securities -- Recharacterization of Servicing Fees" above), and
(iii) a Class of Securities are issued in two or more Classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"-- Standard Securities -- Recharacterization of Servicing Fees." Although not
free from doubt, for purposes of reporting to Stripped Securityholders, the
servicing fees will be allocated to the Classes of Stripped Securities in
proportion to the distributions to such Classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"-- Standard Securities -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects, particularly
where such Stripped Securities are issued with respect to a Mortgage Pool
containing variable-rate Mortgage Loans, the Depositor has been advised by
counsel that (i) the Grantor Trust Fund will be treated as a grantor trust
under subpart E, part I of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Security should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. Although it is possible that computations with respect to
Stripped Securities could be made in one of the ways described below under "--
Possible Alternative Characterizations," the OID Regulations state, in general,
that two or more debt instruments issued by a single issuer to a single
investor in a single transaction should be treated as a single debt instrument.
Accordingly, for original issue discount purposes, all payments on any Stripped
Securities should be aggregated and treated as though they were made on a
single debt instrument. The Pooling and Servicing Agreement will require that
the Trustee make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original
issue discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or
116
super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described above under "-- REMICs --
Taxation of Owners of Regular Securities -- Market Discount," without regard to
the de minimis rule therein, assuming that a prepayment assumption is employed
in such computation.
The holder of a Stripped Security will be treated as owning an interest in
each of the Mortgage Loans held by the Grantor Trust Fund and will recognize an
appropriate share of the income and expenses associated with the Mortgage
Loans. Accordingly, an individual, trust or estate that holds a Stripped
Security directly or through a pass-through entity will be subject to the
limitations on deductions imposed by Code Sections 67 and 68.
A holder of a Stripped Security, particularly any Class of a Series which
is a Subordinate Security, may deduct losses incurred with respect to the
Stripped Security as described above under
"-- Standard Securities -- General."
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that, except with respect to a Trust Fund consisting of
Unsecured Home Improvement Loans, Stripped Securities owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(4)(A), "obligation[s] . . . principally secured
by an interest in real property which is . . . residential real estate" within
the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by an
interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Securities should be considered to represent "interest
on obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B), provided that in each case the Mortgage Loans and
interest on such Mortgage Loans qualify for such treatment. The application of
such Code provisions to Buydown Mortgage Loans is uncertain. See "-- Standard
Securities -- Tax Status" above.
TAXATION OF STRIPPED SECURITIES
Original Issue Discount. Except as described above under "-- General,"
each Stripped Security will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Security must be included in ordinary income as it
accrues, in accordance with a constant yield method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the issue discount required to be
included in the income of a holder of a Stripped Security (referred to in this
discussion as a "STRIPPED SECURITYHOLDER") in any taxable year likely will be
computed generally as described above under "-- REMICs -- Taxation of Owner of
Regular Securities -- Original Issue Discount" and "-- Variable Rate Regular
Securities." However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under "--
General," the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments, other than qualified stated
interest, to be made on the Stripped Security to such Securityholder,
presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by
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such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
a loss (which may be a capital loss) equal to such portion of unrecoverable
basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Stripped Securities as ordinary income.
Investors should consult their tax advisors regarding the appropriate tax
treatment of Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under "-- REMICs
- -- Taxation of Owners of Regular Securities -- Sale or Exchange of Regular
Securities." Gain or loss from the sale or exchange of a Stripped Security
generally will be capital gain or loss to the Securityholder if the Stripped
Security is held as a "capital asset" within the meaning of Code section 1221,
and will be long-term or short-term depending on whether the Stripped Security
has been held for the long-term capital gain holding period (currently, more
than one year). To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described
above. It is not clear for this purpose whether the assumed prepayment rate
that is to be used in the case of a Securityholder other than an original
Securityholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Securityholder may be
treated as the owner of (i) one installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to principal on
each Mortgage Loan and a second installment obligation consisting of such
Stripped Security's pro rata share of the payments attributable to interest on
each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan, or
(iii) a separate installment obligation for each Mortgage Loan, representing
the Stripped Security's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
Classes of Stripped Securities may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Security, or Classes of Stripped Securities in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to
the remainder. Treasury regulations regarding original issue discount on
stripped obligations make the foregoing interpretations less likely to be
applicable. The preamble to such regulations states that they are premised on
the assumption that an aggregation approach is appropriate for determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis, and solicits comments on appropriate rules for aggregating stripped
bonds and stripped coupons under Code Section 1286.
118
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders
are urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held
by persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that
purchased at the issue price. In particular, in the case of Stripped
Securities, unless provided otherwise in the applicable prospectus supplement,
such reporting will be based upon a representative initial offering price of
each Class of Stripped Securities. The Trustee will also file such original
issue discount information with the IRS. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, backup
withholding may be required in respect of any reportable payments, as described
above under "-- REMICs -- Taxation of Certain Foreign Investors -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under "--
REMICs -- Taxation of Certain Foreign Investors -- Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft or Orrick, Herrington & Sutcliffe LLP will
deliver its opinion that the Trust Fund will not be a taxable mortgage pool or
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable Agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the Trust
Fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
Characterization of Investments in Partnership Securities and Debt Securities
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be
119
treated as "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B),
and Debt Securities held by a real estate investment trust will not constitute
"real estate assets" within the meaning of Code Section 856(c)(4)(A), but
Partnership Securities held by a real estate investment trust will qualify
under those sections based on the real estate investments trust's proportionate
interest in the assets of the Partnership Trust Fund qualifying for such
treatments based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
TREATMENT OF THE DEBT SECURITIES AS INDEBTEDNESS
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
or Orrick, Herrington & Sutcliffe LLP will deliver its opinion that the Debt
Securities will be classified as indebtedness for federal income tax purposes.
The discussion below assumes this characterization of the Debt Securities is
correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities
may be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i)
income reportable on Debt Securities is not required to be reported under the
accrual method unless the holder otherwise uses the accrual method and (ii) the
special rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See "-- REMICs
- -- Taxation of Owners of Regular Securities."
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP
If so specified in the applicable prospectus supplement, the Depositor
will agree, and the Securityholders will agree by their purchase of Securities,
to treat the Partnership Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership. However, the proper characterization of the
arrangement involving the Partnership Trust Fund, the Partnership Securities,
the Debt Securities, and the Depositor is not clear, because there is no
authority on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because one or more of the Classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
PARTNERSHIP TAXATION
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Securityholder will be required to separately
take into account such holder's allocated share of
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income, gains, losses, deductions and credits of the Partnership Trust Fund. It
is anticipated that the Partnership Trust Fund's income will consist primarily
of interest earned on the Mortgage Loans (including appropriate adjustments for
market discount, original issue discount and bond premium) as described above
under "-- Standard Securities -- General" and "-- Premium and Discount") and
any gain upon collection or disposition of Mortgage Loans. The Partnership
Trust Fund's deductions will consist primarily of interest accruing with
respect to the Debt Securities, servicing and other fees, and losses or
deductions upon collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Agreements and related documents). The applicable Agreement will provide, in
general, that the Securityholders will be allocated taxable income of the
Partnership Trust Fund for each Due Period equal to the sum of (i) the interest
that accrues on the Partnership Securities in accordance with their terms for
such Due Period, including interest accruing at the applicable pass-through
rate for such Due Period and interest on amounts previously due on the
Partnership Securities but not yet distributed; (ii) any Partnership Trust Fund
income attributable to discount on the Mortgage Loans that corresponds to any
excess of the principal amount of the Partnership Securities over their initial
issue price; and (iii) any other amounts of income payable to the
Securityholders for such Due Period. Such allocation will be reduced by any
amortization by the Partnership Trust Fund of premium on Mortgage Loans that
corresponds to any excess of the issue price of Partnership Securities over
their principal amount. All remaining taxable income of the Partnership Trust
Fund will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Partnership Trust Fund income should
be permissible under applicable Treasury regulations, although no assurance can
be given that the IRS would not require a greater amount of income to be
allocated to Securityholders. Moreover, even under the foregoing method of
allocation, Securityholders may be allocated income equal to the entire
pass-through rate plus the other items described above even though the Trust
Fund might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Partnership Securities on the accrual basis and Securityholders may
become liable for taxes on Partnership Trust Fund income even if they have not
received cash from the Partnership Trust Fund to pay such taxes.
Part or all of the taxable income allocated to a Securityholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) may constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under "-- Standard Securities -- General".
Accordingly, such deductions might be disallowed to the individual in whole or
in part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under "--
Standard Securities -- General" and "-- Premium and Discount." Notwithstanding
such description, it is intended that the Partnership Trust Fund will make all
tax calculations relating to income and allocations to Securityholders on an
aggregate basis with respect to all Mortgage Loans held by the Partnership
Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan basis. If the IRS
were to require that such calculations be made separately for each Mortgage
Loan, the Partnership Trust Fund might be required to incur additional expense,
but it is believed that there would not be a material adverse effect on
Securityholders.
DISCOUNT AND PREMIUM
Unless indicated otherwise in the applicable prospectus supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
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Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See "-- Standard Securities -- Premium and Discount." (As
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Mortgage
Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
SECTION 708 TERMINATION
Under Section 708 of the Code, the Partnership Trust Fund will be deemed
to terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. If such a termination occurs, it would cause a deemed
contribution of the assets of a Partnership Trust Fund (the "OLD PARTNERSHIP")
to a new Partnership Trust Fund (the "NEW PARTNERSHIP") in exchange for
interests in the new partnership. Such interests would be deemed distributed to
the partners of the old partnership in liquidation thereof, which would not
constitute a sale or exchange. The Partnership Trust Fund will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. As a result, the Partnership Trust Fund may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Partnership Trust Fund might
not be able to comply due to lack of data.
DISPOSITION OF SECURITIES
Generally, capital gain or loss will be recognized on a sale of
Partnership Securities in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Securities sold. A
Securityholder's tax basis in an Partnership Security will generally equal the
holder's cost increased by the holder's share of Partnership Trust Fund income
(includable in income) and decreased by any distributions received with respect
to such Partnership Security. In addition, both the tax basis in the
Partnership Securities and the amount realized on a sale of an Partnership
Security would include the holder's share of the Debt Securities and other
liabilities of the Partnership Trust Fund. A holder acquiring Partnership
Securities at different prices may be required to maintain a single aggregate
adjusted tax basis in such Partnership Securities, and, upon sale or other
disposition of some of the Partnership Securities, allocate a portion of such
aggregate tax basis to the Partnership Securities sold (rather than maintaining
a separate tax basis in each Partnership Security for purposes of computing
gain or loss on a sale of that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the
holder's share of unrecognized accrued market discount on the Mortgage Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Partnership Trust Fund does not
expect to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Partnership Securities.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will
be apportioned among the Securityholders in
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proportion to the principal amount of Partnership Securities owned by them as
of the close of the last day of such Due Period. As a result, a holder
purchasing Partnership Securities may be allocated tax items (which will affect
its tax liability and tax basis) attributable to periods before the actual
transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder as long as the amount of any money
distributed with respect to such Security does not exceed the adjusted basis of
such Securityholder's interest in the Security. To the extent that the amount
of money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
SECTION 754 ELECTION
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis
in the Partnership Securities than the selling Securityholder had. The tax
basis of the Partnership Trust Fund's assets would not be adjusted to reflect
that higher (or lower) basis unless the Partnership Trust Fund were to file an
election under Section 754 of the Code. In order to avoid the administrative
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Partnership
Trust Fund will not make such an election. As a result, a Securityholder might
be allocated a greater or lesser amount of Partnership Trust Fund income than
would be appropriate based on its own purchase price for Partnership
Securities.
ADMINISTRATIVE MATTERS
The Trustee is required to keep or have kept complete and accurate books
of the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to
holders and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with
the information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership
Securities. Generally, holders must file tax returns that are consistent with
the information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership
Securities so held. Such information includes (i) the name, address and
taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly-owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Partnership Securities that were held, bought or sold on
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behalf of such person throughout the year. In addition, brokers and financial
institutions that hold Partnership Securities through a nominee are required to
furnish directly to the Trustee information as to themselves and their
ownership of Partnership Securities. A clearing agency registered under Section
17A of the Exchange Act is not required to furnish any such information
statement to the Partnership Trust Fund. The information referred to above for
any calendar year must be furnished to the Partnership Trust Fund on or before
the following January 31. Nominees, brokers and financial institutions that
fail to provide the Partnership Trust Fund with the information described above
may be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the
Securityholders, and, under certain circumstances, a Securityholder may be
precluded from separately litigating a proposed adjustment to the items of the
Partnership Trust Fund. An adjustment could also result in an audit of a
Securityholder's returns and adjustments of items not related to the income and
losses of the Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN SECURITYHOLDERS
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Partnership Trust Fund
would be engaged in a trade or business in the United States for such purposes,
if so specified in the applicable prospectus supplement, the Partnership Trust
Fund may withhold as if it were so engaged in order to protect the Partnership
Trust Fund from possible adverse consequences of a failure to withhold. The
Partnership Trust Fund may withhold on the portion of its taxable income that
is allocable to Securityholders who are Non-U.S. Persons pursuant to Section
1446 of the Code, as if such income were effectively connected to a U.S. trade
or business, at the maximum tax rate for corporations or individuals, as
applicable. Amounts withheld will be deemed distributed to the Non-U.S. Person
Securityholders. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Partnership Trust Fund to
change its withholding procedures. In determining a holder's withholding
status, the Partnership Trust Fund may rely on IRS Form W-8BEN, IRS Form W-9 or
the holder's certification of nonforeign status signed under penalties of
perjury.
To the extent specified in the applicable prospectus supplement,
o each Non-U.S. Person holder might be required to file a U.S. individual
or corporate income tax return (including, in the case of a corporation,
the branch profits tax) on its share of the Partnership Trust Fund's
income;
o each Non-U.S. Person holder must obtain a taxpayer identification number
from the IRS and submit that number to the Partnership Trust Fund on Form
W-8BEN in order to assure appropriate crediting of the taxes withheld;
and
o a Non-U.S. Person holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the Partnership
Trust Fund, taking the position that no taxes were due because the
Partnership Trust Fund was not engaged in a U.S. trade or business.
Notwithstanding the foregoing, interest payments made (or accrued) to a
Securityholder who is a Non-U.S. Person may be considered guaranteed payments
to the extent such payments are determined without regard to the income of the
Partnership Trust Fund. If these interest payments are
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properly characterized as guaranteed payments, then the interest may not be
considered "portfolio interest." As a result, Securityholders who are Non-U.S.
Persons may be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a Non-U.S. Person holder would only be entitled to claim
a refund for that portion of the taxes in excess of the taxes that should be
withheld with respect to the guaranteed payments.
BACKUP WITHHOLDING
Distributions made on the Partnership Securities and proceeds from the
sale of the Partnership Securities will be subject to a "backup" withholding
tax of 30% (decreasing to 28% by 2006) if, in general, the Securityholder fails
to comply with certain identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES,
PARTNERSHIP SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES
UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
RECENT TAX LAW CHANGES
Under the Economic Growth and Tax Relief Reconciliation Act of 2001, among
other changes:
o the maximum tax rate on ordinary income and short-term capital gains
will be reduced to 35% over the period 2001 to 2006,
o the limitation on itemized deductions of individuals imposed by Code
Section 68 will be phased out starting in 2006 and will be eliminated
after 2009, and
o the rate of backup withholding tax under Code Section 3406 will be
reduced from 30.5% to 28% over the period 2001 to 2006.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and the discussion above does not purport to
describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Securities
offered hereunder.
ERISA CONSIDERATIONS
ERISA and the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts in which such plans, accounts or arrangements are
invested, that are subject to Title I of ERISA and Section 4975 of the Code
("PLANS") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Securities without regard
to the ERISA considerations described below, subject to the provisions of other
applicable federal, state and local law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code, however, is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
GENERAL ERISA STANDARDS
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, ERISA and Section 4975 of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
("PARTIES IN INTEREST") who have certain specified relationships to the Plan
unless a statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to an
excise tax imposed pursuant to Section 4975 of the Code, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Sections 406 and 407 of ERISA and Section 4975 of the Code.
A Plan's investment in Securities may cause the Mortgage Loans, Contracts,
Unsecured Home Improvement Loans and other assets included in a related Trust
Fund to be deemed Plan assets. Section 2510.3-101 of the regulations of the
United States Department of Labor ("DOL") provides that when a Plan acquires an
equity interest in an entity, the Plan's assets include both such equity
interest and an undivided interest in each of the underlying assets of the
entity, unless certain exceptions not applicable here apply, or unless the
equity participation in the entity by "benefit plan investors" (i.e., Plans and
employee benefit plans not subject to ERISA) is not "significant", both as
defined therein. For this purpose, in general, equity participation by benefit
plan investors will be "significant" on any date if 25% or more of the value of
any Class of equity interests in the entity is held by benefit plan investors.
To the extent the Securities are treated as equity interests for purposes of
DOL regulations section 2510.3-101, equity participation in a Trust Fund will
be significant on any date if immediately after the most recent acquisition of
any Security, 25% or more of any Class of Securities is held by benefit plan
investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Mortgage Loans, Contracts, Unsecured Home Improvement
Loans and other assets included in a Trust Fund constitute Plan assets, then
any party exercising management or discretionary control regarding those
assets, such as the Servicer or Master Servicer,
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may be deemed to be a Plan "fiduciary" and thus subject to the fiduciary
responsibility provisions and prohibited transaction provisions of ERISA and
Section 4975 of the Code with respect to the investing Plan. In addition, if
the Mortgage Loans, Contracts, Unsecured Home Improvement Loans and other
assets included in a Trust Fund constitute Plan assets, the purchase of
Securities by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA and the Code.
The DOL has granted to Wachovia Securities (formerly First Union
Securities, Inc.), an individual administrative exemption, Prohibited
Transaction Exemption ("PTE") 96-22, 61 Fed. Reg. 14828 (April 3, 1996), as
most recently amended and restated by PTE 2002-41, 67 Fed. Reg. 54487 (August
22, 2002) (the "EXEMPTION"), which generally exempts from the application of
(i) the prohibited transaction provisions of Sections 406(a) and 407 of ERISA
and (ii) the excise taxes imposed on such prohibited transactions pursuant to
Sections 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the purchase,
sale and holding of Securities underwritten by an Underwriter (as defined
below) that (a) represent a beneficial ownership interest in the assets of a
Trust Fund and entitle the holder the pass-through payments of principal,
interest and/or other payments made with respect to the assets of the Trust
Fund or (b) are denominated as a debt instrument and represent an interest in a
REMIC, provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this "ERISA Considerations" Section, the term
"UNDERWRITER" includes (a) Wachovia Corporation, (b) any person directly or
indirectly, through one or more intermediaries, controlling, controlled by or
under common control with Wachovia Corporation, including Wachovia Securities,
Inc., and (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with respect
to a Class of Securities.
The Exemption sets forth five general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Securities to be
eligible for exemptive relief thereunder.
1. The acquisition of Securities by a Plan must be on terms that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party.
2. The Securities at the time of acquisition by the Plan must be rated in
one of the four highest generic rating categories by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"), Moody's Investors
Service, Inc. ("MOODY'S") or Fitch Ratings ("FITCH").
3. The Trustee cannot be an affiliate of any member of the "RESTRICTED
GROUP" other than the Underwriter. The Restricted Group consists of the
Underwriters, the Depositor, the Trustee, the Master Servicer, any
Servicer, any insurer and any obligor with respect to Assets constituting
more than 5% of the aggregate unamortized principal balance of the Assets
in the related Trust Fund as of the date of initial issuance of the
Securities.
4. The sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Securities; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Assets to the related Trust Fund must
represent not more than the fair market value of such obligations; and
the sum of all payments made to and retained by the Servicer must
represent not more than reasonable compensation for such person's
services under the applicable Agreement and reimbursement of such
person's reasonable expenses in connection therewith.
5. The investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the SEC under the Securities Act of 1933, as
amended (the "SECURITIES ACT").
In addition, the Trust Fund must meet the following requirements:
o the assets of the Trust Fund must consist solely of assets of the type
that have been included in other investment pools;
o securities evidencing interests in such other investment pools must have
been rated in one of the four highest generic rating categories by S&P,
Moody's or Fitch for at least one year prior to the Plan's acquisition of
the securities; and
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o securities evidencing interests in such other investment pools must have
been purchased by investors other than Plans for at least one year prior
to any Plan's acquisition of the Securities.
A fiduciary of a Plan contemplating purchasing a Security must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Security. In addition, any Securities representing a
beneficial ownership interest in Unsecured Home Improvement Loans or Revolving
Credit Line Loans will not satisfy the general conditions of the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the prohibited transaction provisions of Sections
406(a) and 407 of ERISA and Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Securities by Plans. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Security on behalf of an "EXCLUDED PLAN" by any person who has
discretionary authority or renders investment advice with respect to the assets
of such Excluded Plan. For purposes of the Securities, an Excluded Plan is a
Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the prohibited transaction provisions
of Sections 406(b)(1) and (b)(2) of ERISA and Section 4975(c)(1)(E) of the
Code, for transactions in connection with (1) the direct or indirect sale,
exchange or transfer of Securities in the initial issuance of Securities
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in the Securities is (a) an obligor with respect to
5% or less of the fair market value of the Assets or (b) an affiliate of such a
person, (2) the direct or indirect acquisition or disposition in the secondary
market of Securities by a Plan and (3) the holding of Securities by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the prohibited transaction
provisions of Sections 406(a), 406(b) and 407 of ERISA and Section 4975(c) of
the Code for transactions in connection with the servicing, management and
operation of the Trust Fund. The Depositor expects that the specific conditions
of the Exemption required for this purpose will be satisfied with respect to
the Securities so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the excise
taxes imposed by Sections 4975(a) and (b) of the Code by reason of Section
4975(c) of the Code) for transactions in connection with the servicing,
management and operation of the Assets, provided that the general conditions of
the Exemption are satisfied.
The Exemption also may provide an exemption from the prohibited
transaction provisions of Sections 406(a) and 407(a) of ERISA and Sections
4975(c)(1)(A) through (D) of the Code, for transactions that would otherwise be
prohibited merely because a person is deemed to be a Party in Interest (within
the meaning of Section 3(14) of ERISA) with respect to an investing Plan by
virtue of providing services to the Plan (or by virtue of having certain
specified relationships to such a person) solely as a result of the Plan's
ownership of Securities.
The Exemption also permits the inclusion of a Pre-Funding Account in a
Trust Fund, provided that the following conditions are met:
o the Pre-Funding Account may not exceed 25% of the total amount of
Securities being offered;
o additional obligations purchased generally must meet the same terms and
conditions as those of the original obligations used to create the Trust
Fund;
o the transfer of additional obligations to the Trust Fund during the
Pre-Funding Period must not result in the Securities receiving a lower
rating at the termination of the Pre-Funding Period than the rating that
was obtained at the time of the initial issuance of the Securities;
128
o the weighted average interest rate for all of the obligations in the
Trust Fund at the end of the Pre-Funding Period must not be more than 100
basis points less than the weighted average interest rate for the
obligations which were transferred to the Trust Fund on the closing date;
o the characteristics of the additional obligations must be monitored to
confirm that they are substantially similar to those which were acquired
as of the closing date either by a credit support or insurance provider
independent of the Depositor or by an independent accountant retained by
the Depositor that confirms such conformance in writing;
o the Pre-Funding Period must be described in the prospectus or private
placement memorandum provided to investing Plans; and
o the trustee of the Trust Fund must be a substantial financial
institution or trust company experienced in trust activities and familiar
with its duties, responsibilities and liabilities as a fiduciary under
ERISA.
Further, the Pre-Funding Period must be a period beginning on the closing
date and ending no later than the earliest to occur of (x) the date the amount
on deposit in the Pre-Funding Account is less than the minimum dollar amount
specified in the; (y) the date on which an event of default occurs under the
applicable Agreement; or (z) the date which is the later of three months or 90
days after the closing date. It is expected that the Pre-Funding Account will
meet all of these requirements.
PROHIBITED TRANSACTION RESTRICTIONS ON NON-EQUITY SECURITIES
To the extent the Securities are not treated as equity interests for
purposes of DOL regulations section 2510.3-101, a Plan's investment in such
Securities ("NON-EQUITY SECURITIES") would not cause the Assets included in a
related Trust Fund to be deemed Plan assets. However, the Depositor, the
Servicer, the Trustee or an Underwriter may be the sponsor of or investment
advisor with respect to one or more Plans. Because such parties may receive
certain benefits in connection with the sale of Non-Equity Securities, the
purchase of Non-Equity Securities using Plan assets over which any such party
has investment authority might be deemed to constitute or result in a violation
of the prohibited transaction rules of ERISA and Section 4975 of the Code for
which no exemption may be available. Accordingly, Non-Equity Securities may not
be purchased using the assets of any Plan if any of the Depositor, the
Servicer, the Trustee or Underwriters has investment authority with respect to
such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Securities, because of its activities or the activities of its respective
affiliates, may be deemed to be a Party in Interest (within the meaning of
Section 3(14) of ERISA) with respect to certain Plans, including but not
limited to Plans sponsored by such holder. In either case, the acquisition or
holding of Non-Equity Securities by or on behalf of such a Plan could be
considered to give rise to an indirect prohibited transaction under ERISA and
Section 4975 of the Code, unless it is subject to one or more statutory or
administrative exemptions such as Prohibited Transaction Class Exemption
("PTCE") 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager"; PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts; PTCE 91-38,
which exempts certain transactions involving bank collective investment funds;
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts; or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house" asset managers. It should be noted,
however, that even if the conditions specified in one or more of these
exemptions are met, the scope of relief provided by these exemptions may not
necessarily cover all acts that might be construed as prohibited transactions.
CONSULTATION WITH COUNSEL
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment, the
129
availability of the exemptive relief provided in the Exemption and the
potential applicability of any other prohibited transaction exemption in
connection therewith. In particular, a Plan fiduciary which proposes to cause a
Plan to purchase Securities representing a beneficial ownership interest in a
pool of single-family residential first mortgage loans, a Plan fiduciary should
consider the applicability of PTCE 83-1, which provides exemptive relief for
certain transactions involving mortgage pool investment trusts. The prospectus
supplement with respect to a Series of Securities may contain additional
information regarding the application of the Exemption, PTCE 83-1 or any other
exemption, with respect to the Securities offered thereby. In addition, any
Plan fiduciary that proposes to cause a Plan to purchase Strip Securities
should consider the federal income tax consequences of such investment.
Fiduciaries of plans not subject to ERISA or Section 4975 of the Code, such as
government plans, should consider the application of any applicable federal,
state or local law materially similar to the provisions of ERISA or Section
4975 of the Code, as well as the need for and the availability of exemptive
relief under such applicable law.
ANY PLAN FIDUCIARY CONSIDERING WHETHER TO PURCHASE A SECURITY ON BEHALF OF
A PLAN SHOULD CONSULT WITH ITS COUNSEL REGARDING THE APPLICABILITY OF THE
FIDUCIARY RESPONSIBILITY AND PROHIBITED TRANSACTION PROVISIONS OF ERISA AND
SECTION 4975 OF THE CODE TO SUCH INVESTMENT.
THE SALE OF SECURITIES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY THE
DEPOSITOR OR ANY UNDERWRITER THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN, OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY
PARTICULAR PLAN.
LEGAL INVESTMENT
As will be specified in the applicable prospectus supplement, certain
Classes of the Securities may constitute "mortgage related securities " for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Fund consisting of Mortgage Loans originated
by certain types of originators specified in SMMEA and secured by first liens
on real estate. As "mortgage related securities," such Classes will constitute
legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including but not limited
to depository institutions, insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities," in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Offered Securities only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national
banks may purchase mortgage related securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U. S. C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C. F. R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards in 12 C.
F. R. Section 1.5 concerning "safety and soundness" and retention of credit
information), certain "Type IV securities," defined in 12 C. F. R.
Section 1.2(m) to include certain "residential mortgage-related securities." As
so
130
defined, "residential mortgage-related security" means, in relevant part,
"mortgage related security" within the meaning of SMMEA. The National Credit
Union Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. Section 703.140. The OTS has issued Thrift Bulletin 13a
(December 1, 1998), "Management of Interest Rate Risk, Investment Securities,
and Derivative Activities," which thrift institutions subject to the
jurisdiction of the OTS should consider before investing in any of the Offered
Securities.
All depository institutions considering an investment in the Offered
Securities should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 POLICY STATEMENT")
of the Federal Financial Institutions Examination Council ("FFIEC"), which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the OTS, effective May 26,
1998, and by the NCUA, effective October 1, 1998. The 1998 Policy Statement
sets forth general guidelines which depository institutions must follow in
managing risks (including market, credit, liquidity, operational (transaction),
and legal risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies, and guidelines
adopted from time to time by those authorities before purchasing any Class of
the Offered Securities, as certain Classes may be deemed unsuitable
investments, or may otherwise be restricted, under those rules, policies, or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines, or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not
"interest-bearing" or "income-paying," and, with regard to any Class of Offered
Securities issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Offered Securities as
"mortgage related securities," no representations are made as to the proper
characterization of the Offered Securities for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase any Offered Securities under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Securities) may
adversely affect the liquidity of the Offered Securities.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Securities of any Class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
METHODS OF DISTRIBUTION
The Securities offered hereby and by the applicable prospectus supplement
to this prospectus will be offered in Series. The distribution of the
Securities may be effected from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. If so specified in the related prospectus supplement, the
Securities will be distributed in a firm commitment underwriting, subject to
the terms and conditions of the underwriting agreement, by Wachovia
131
Securities, Inc. ("WACHOVIA SECURITIES") acting as underwriter with other
underwriters, if any, named therein. In such event, the prospectus supplement
may also specify that the underwriters will not be obligated to pay for any
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of the Securities,
underwriters may receive compensation from the Depositor or from purchasers of
the Securities in the form of discounts, concessions or commissions. The
prospectus supplement will describe any such compensation paid by the
Depositor.
Alternatively, the prospectus supplement may specify that the Securities
will be distributed by Wachovia Securities acting as agent or in some cases as
principal with respect to Securities which it has previously purchased or
agreed to purchase. If Wachovia Securities acts as agent in the sale of
Securities, Wachovia Securities will receive a selling commission with respect
to each Series of Securities, depending on market conditions, expressed as a
percentage of the aggregate principal balance of the related Mortgage Loans as
of the Cut-off Date. The exact percentage for each Series of Securities will be
disclosed in the related prospectus supplement. To the extent that Wachovia
Securities elects to purchase Securities as principal, Wachovia Securities may
realize losses or profits based upon the difference between its purchase price
and the sales price. The prospectus supplement with respect to any Series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Securities of such Series.
Wachovia Securities is an affiliate of the Depositor. This prospectus may
be used by Wachovia Securities, to the extent required, in connection with
market making transactions in the Securities. Wachovia Securities may act as
principal or agent in such transactions.
The Depositor will indemnify Wachovia Securities and any underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments Wachovia Securities and any underwriters
may be required to make in respect thereof.
In the ordinary course of business, Wachovia Securities and the Depositor
may engage in various securities and financing transactions, including
repurchase agreements to provide interim financing of the Depositor's mortgage
loans pending the sale of such mortgage loans or interests therein, including
the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Securities. Securityholders should consult with
their legal advisors in this regard prior to any such reoffer or sale.
As to each Series of Securities, only those Classes rated in one of the
four highest rating categories by any Rating Agency will be offered hereby. Any
unrated Class may be initially retained by the Depositor, and may be sold by
the Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Securityholders of an investment in the Securities of a Series, will be passed
upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New York or
Orrick, Herrington & Sutcliffe LLP, Washington, D.C.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this prospectus or in the related prospectus supplement.
132
RATINGS
It is a condition to the issuance of any Class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one nationally recognized
statistical rating agency ("RATING AGENCY").
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Securityholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently of
any other security rating.
WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement (the "REGISTRATION
STATEMENT") relating to the Securities with the SEC. This prospectus is part of
the Registration Statement, but the Registration Statement includes additional
information.
Copies of the Registration Statement may be obtained from the Public
Reference Section of the SEC, Washington, D.C. 20549 upon payment of the
prescribed charges, or may be examined free of charge at the SEC's offices, 450
Fifth Street N.W., Washington, D.C. 20549 or at the regional offices of the SEC
located at 233 Broadway, New York, New York 10279 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. The SEC also
maintains a site on the World Wide Web at "http://www.sec.gov" at which you can
view and download copies of reports, proxy and information statements and other
information filed electronically through the Electronic Data Gathering,
Analysis and Retrieval ("EDGAR") system. The Depositor has filed the
Registration Statement, including all exhibits, through the EDGAR system and
therefore such materials should be available by logging onto the SEC's Web
site. The SEC maintains computer terminals providing access to the EDGAR system
at each of the offices referred to above. Copies of any documents incorporated
to this prospectus by reference will be provided to each person to whom a
prospectus is delivered upon written or oral request directed to Wachovia Asset
Securitization, Inc., 8739 Research Drive, NC0121-Suite D, Charlotte, North
Carolina 28288-0121, telephone number (704) 596-7616.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this prospectus. In all cases, you should rely on the
later information rather than on any different information included in this
prospectus or the accompanying prospectus supplement. The Depositor
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the Trust until the termination of the offering of the
related Series of Securities offered hereby (including market making
transactions by Wachovia Securities, to the extent required, with respect to
such Series of Securities, unless such transactions are exempt from the
registration provisions of the Securities Act).
As a recipient of this prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference) at no cost, by
writing or calling the Treasurer at Wachovia Asset Securitization, Inc., 8739
Research Drive NC0121-Suite D, Charlotte, North Carolina 28288-0121, telephone
number (704) 596-7616.
133
INDEX OF SIGNIFICANT DEFINITIONS
1998 Policy Statement .................................................. 131
Accrual Period ......................................................... 25
Accrual Securities ..................................................... 31
Accrued Security Interest .............................................. 33
Additional Collateral Assets ........................................... 18
Adjustable Rate Assets ................................................. 17
Agreement .............................................................. 47
ARM Contracts .......................................................... 23
ARM Loans .............................................................. 20
ARM Unsecured Home Improvement
Loans .................................................................. 22
Asset Conservation Act ................................................. 81
Asset Group ............................................................ 31
Asset Seller ........................................................... 17
Assets ................................................................. 17
Available Distribution Amount .......................................... 32
Balloon Payment Assets ................................................. 18
Bankruptcy Code ........................................................ 77
Bi-Weekly Assets ....................................................... 18
Book-entry Securities .................................................. 31
Buy Down Assets ........................................................ 17
Buydown Funds .......................................................... 92
Buydown Mortgage Loans ................................................. 28
Buydown Period ......................................................... 28
Capitalized Interest Account ........................................... 24
Cash Flow Agreement .................................................... 24
CEDE ................................................................... 44
CERCLA ................................................................. 80
Certificates ........................................................... 31
Class .................................................................. 31
Cleanup Costs .......................................................... 80
Clearstream ............................................................ 45
Clearstream Participants ............................................... 45
Code ................................................................... 89
Collection Account ..................................................... 51
Component .............................................................. 35
Contract Borrower ...................................................... 72
Contract Lender ........................................................ 72
Contract Rate .......................................................... 23
Contracts .............................................................. 17
Convertible Assets ..................................................... 18
Cooperative ............................................................ 45, 71
Cooperative Loans ...................................................... 71
Cooperatives ........................................................... 19
Covered Trust .......................................................... 67
CPR .................................................................... 27
Credit Support ......................................................... 24
Cut-off Date ........................................................... 19
Debt Securities ........................................................ 89
Definitive Securities .................................................. 31, 43
Deposit Trust Agreement ................................................ 47
Depositaries ........................................................... 46
Depositor .............................................................. 30
Determination Date ..................................................... 32
Disqualified Organization .............................................. 105
Distribution Date ...................................................... 25
DOL .................................................................... 126
Due Period ............................................................. 32
Edgar .................................................................. 133
Electing Large Partnership ............................................. 105
Euroclear .............................................................. 45
Euroclear Operator ..................................................... 45
Euroclear Participants ................................................. 45
Excess Servicing ....................................................... 115
Exchange Act ........................................................... 44
Excluded Plan .......................................................... 128
Exemption .............................................................. 127
FDIC ................................................................... 51
FFIEC .................................................................. 131
First Lien Mortgage Loans .............................................. 19
Fitch .................................................................. 127
Garn-St. Germain Act ................................................... 82
GEM Assets ............................................................. 18
GPM Assets ............................................................. 18
Grantor Trust Fund ..................................................... 89
Grantor Trust Securities ............................................... 89
Home Equity Loans ...................................................... 19
Home Improvement Contracts ............................................. 19
HOPA ................................................................... 84
Increasing Payment Asset ............................................... 18
Increasing Payment Assets .............................................. 17
Indenture .............................................................. 47
Indenture Servicing Agreement .......................................... 47
Indenture Trustee ...................................................... 47
Indirect Participants .................................................. 44
Insurance Proceeds ..................................................... 32
Interest Reduction Assets .............................................. 18
Interest-only Assets ................................................... 18
IRS .................................................................... 55
Land Sale Contract ..................................................... 72
Land Sale Contracts .................................................... 19
Level Payment Assets ................................................... 17
Liquidation Proceeds ................................................... 32
Loan-to-Value Ratio .................................................... 19, 22
Lock-out Date .......................................................... 21
Lock-out Period ........................................................ 21
134
Manufactured Home ...................................................... 22
Mark to Market Regulations ............................................. 108
Master Servicer ........................................................ 47
MERS ................................................................... 48
Moody's ................................................................ 127
Mortgage Loans ......................................................... 17
Mortgage Notes ......................................................... 19
Mortgage Rate .......................................................... 20
Mortgages .............................................................. 19
Multifamily Mortgage Loan .............................................. 19
Multifamily Property ................................................... 19
National Housing Act ................................................... 20
NCUA ................................................................... 131
New Partnership ........................................................ 122
New Regulations ........................................................ 110
Non-Equity Securities .................................................. 129
Non-Pro Rata Security .................................................. 94
Non-U.S. Person ........................................................ 110
Nonrecoverable Advance ................................................. 40
Notes .................................................................. 31
OCC .................................................................... 130
Offered Securities ..................................................... 31
OID Regulations ........................................................ 90, 93
Old Partnership ........................................................ 122
Originator ............................................................. 19
OTS .................................................................... 82
PAC Certificates ....................................................... 36
PAC I .................................................................. 36
PAC II ................................................................. 36
PAC Notes .............................................................. 36
Participants ........................................................... 44
Parties in Interest .................................................... 126
Partnership Securities ................................................. 89
Partnership Trust Fund ................................................. 89
Pass-Through Entity .................................................... 105
Pass-Through Rate ...................................................... 33
PCBs ................................................................... 80
Permitted Investments .................................................. 51
Plans .................................................................. 126
PMI .................................................................... 84
Pooling and Servicing Agreement ........................................ 47
Pre-Funded Amount ...................................................... 23
Pre-Funding Account .................................................... 23
Pre-Funding Period ..................................................... 23
prepayment ............................................................. 27
Prepayment Assumption .................................................. 94
Prepayment Premium ..................................................... 21
PTCE ................................................................... 129
PTE .................................................................... 127
Purchase Price ......................................................... 49
Rating Agency .......................................................... 133
RCRA ................................................................... 81
Record Date ............................................................ 32
Refinance Loans ........................................................ 19
Registration Statement ................................................. 133
Regular Securities ..................................................... 90
Regular Securityholder ................................................. 93
Related Proceeds ....................................................... 40
Relief Act ............................................................. 84
REMIC Provisions ....................................................... 89
REMIC Regulations ...................................................... 90
REMIC Securities ....................................................... 89
REO Property ........................................................... 41
Residual Holders ....................................................... 101
Residual Securities .................................................... 90
Restricted Group ....................................................... 127
Retained Interest ...................................................... 58
Revolving Credit Line Loans ............................................ 21
S&P .................................................................... 127
SBJPA of 1996 .......................................................... 92
Scheduled Certificates ................................................. 36
Scheduled Notes ........................................................ 36
SEC .................................................................... 20
Securities ............................................................. 31
Securities Act ......................................................... 127
Security ............................................................... 47
Security Balance ....................................................... 27
Security Owners ........................................................ 44
Securityholder ......................................................... 25
Senior Certificates .................................................... 31
Senior Notes ........................................................... 31
Senior Securities ...................................................... 31
Series ................................................................. 31
Servicers .............................................................. 47
Servicing Standard ..................................................... 54
Single Family Mortgage Loan ............................................ 19
Single Family Property ................................................. 19
SMMEA .................................................................. 130
SPA .................................................................... 27
Special Servicer ....................................................... 60
Standard Securities .................................................... 112
Step-up Rate Assets .................................................... 18
Strip Securities ....................................................... 31
Stripped Securities .................................................... 116
Stripped Securityholder ................................................ 117
Subordinate Certificates ............................................... 31
Subordinate Notes ...................................................... 31
Subordinate Securities ................................................. 31
Subsequent Assets ...................................................... 23
Super-Premium .......................................................... 94
Superliens ............................................................. 80
Support Certificates ................................................... 35
135
Support Notes .......................................................... 35
TAC Certificates ....................................................... 37
TAC Notes .............................................................. 37
Taxable Mortgage Pools ................................................. 90
Terms and Conditions ................................................... 45
Texas Home Equity Laws ................................................. 84
Thrift Institutions .................................................... 104
Tiered REMICs .......................................................... 93
TILA Amendment ......................................................... 79
Title V ................................................................ 83
Title VIII ............................................................. 83
Trust .................................................................. 31
Trust Fund ............................................................. 31
Trustee ................................................................ 47
U.S. Person ............................................................ 107
UCC .................................................................... 44
Underlying Servicing Agreement ......................................... 47
Underwriter ............................................................ 127
Unsecured Home Improvement Loans ....................................... 17
UST .................................................................... 81
Value .................................................................. 19
Wachovia Securities .................................................... 132
Warranting Party ....................................................... 50
136
$1,250,000,000
WACHOVIA BANK, NATIONAL ASSOCIATION
SELLER AND SERVICER
WACHOVIA ASSET SECURITIZATION, INC. 2003-HE2 TRUST
ISSUER
WACHOVIA ASSET SECURITIZATION, INC.
DEPOSITOR
WACHOVIA ASSET SECURITIZATION, INC.
ASSET-BACKED NOTES, SERIES 2003-HE2
[Graphic Omitted]
WACHOVIA
---------------
PROSPECTUS SUPPLEMENT
---------------
UNDERWRITERS
WACHOVIA SECURITIES
MERRILL LYNCH & CO. UBS INVESTMENT BANK
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not be
relied upon. This prospectus supplement and the prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
notes offered hereby, nor an offer of the notes in any state or jurisdiction in
which, or to any person to whom, such offer would be unlawful. The delivery of
this prospectus supplement or the prospectus at any time does not imply that
information in this prospectus supplement or in the accompanying prospectus is
correct as of any time subsequent to its date; however, if any material change
occurs while this prospectus supplement or the prospectus is required by law to
be delivered, this prospectus supplement or the prospectus will be amended or
supplemented accordingly.
Until 90 days after the date of this prospectus supplement, all dealers
selling the notes, whether or not participating in this distribution, will
deliver a prospectus supplement and the prospectus to which it relates. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus supplement and prospectus when acting as underwriter and with respect
to their unsold allotments or subscriptions.